Q. My poor ole IRA got really killed from the stock market. I am thinking of cashing in and taking what little's left and just putting it into a bank money market account. We've pretty much sold everything we had in the stock market.... I don't want to go that route anymore! Any suggestions?
A. There are many other ways to go about this than to cash your IRA out. In my post titled "Tempted to cash out your 401(k) or IRA? There are other options" I've detailed five alternatives to cashing out.
Meanwhile, your IRA itself could invest in a bank money market fund instead of stocks. Most IRA custodial firms offer this as an option.
Cashing out your IRA now will cause you to lose 10 percent more of its value (thanks to an I.R.S.-levied early withdrawal penalty). Plus you'll have to pay income taxes on the cashed-out amount at your current rate. If your current tax rate is 15 percent, plus the 10 percent penalty above, then cashing out now will cause the balance to drop another 25 percent this year alone.
The bottom line? Consider your options! The stocks in your portfolio would have to fall another 25 percent in the next year to make cashing out close to break-even for you.
I hope this helps.
Sincerely,
Jennifer D. Meacham
"Ms. Meacham Money Maven"
Money Correspondent, Gather.com
Co-author, "IRA Wealth: Revolutionary IRA Strategies for Real Estate Investment" ($17.95)
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Comments: 17
That's not even counting your inability to recoup on the stocks that have fallen so low when/if the stocks rebound. Economists are predicting stock prices will indeed start recovering within the next six months to a year.
Also I feel that it would be a good idea to invest what you normally would have every month and continue that investment in your retirement.
When retail investors give up and start cashing out long term holdings, that is often a sign of the bottom.
There is even a term for it - capitulation.
My point exactly Pat. I'm not saying forget about what's in your account however. Now indeed is the time to reevaluate and reposition holdings that may not recover at all. And yes, as a few people mentioned here, keep making those deposits. When stocks are at there lowest (and some would say that time is now), then that indeed is the time to buy, buy, buy (with guidance as needed).
It is likely to take years to recover the levels we had even last year.
There is no hurry to buy stocks. There will be many many opportunities.
Cash is the place to be until we see some sustained upside. This strategy will have you miss the first 10% on the upside, but it reduces the risk of giving even more back.
Plus, this indeed can be done without cashing out, without closing the account and without taking a penalty-inducing/taxable personal distribution. To me, that's a key factor.
Either way, as you strongly suggest, now indeed is the time to consider those options and take swift action to protect the value of what remains in the respective account.
I am not saying to cash out now if you have stocks or funds.
I am saying there is no hurry to put new money into stocks or mutual funds. Once the market finds a bottom, it will not start going up immediately. The will likely be several months of consolidation before we see recovery.
I am saying stay in your 401k and continue to make contributions. Put the money in the cash or money market choice. When the market begins to recover, reallocate.