David McPherson Answers Your Money Questions

McPherson answered: Doris, The short answer: No. Based on your question, I'm assuming you're under age 59 and-a-half, and that's why you're asking about paying a penalty on your retirement funds. If you're uncomfortable with your investment portfolio, you can lower the risk level in your portfolio without incurring an early withdrawal penalty.

If the money is in an IRA, you can easily invest all or a portion of your portfolio in lower-risk options like bonds or cash. In an employer-sponsored plan like a 401(k) or 403(b), your investment options are dictated by your employer. But most employer-sponsored plans include bond and cash options.

Above all else, I would avoid a withdrawal that incurs taxes and penalty. A hasty, premature withdrawal from a retirement plan can easily cost you 40 percent or more in taxes and penalties depending upon your tax bracket and the state in which you live.

Edra, from Fort Wayne, Ind., asked: "The 401K has lost over $30,000 -- my husband is 55, I am 57. Should we keep contributing or should we pull out the remaining money and put into a savings or money market account or CD? Seems like the contributions are just disappearing. Any recommendation would be appreciated."

McPherson answered: Edra, as I told Doris above, I would avoid making an early withdrawal that would trigger taxes and penalties. You should be able to shift to more conservative investment options within the 401(k) plan if you think that's best and still avoid a 40 percent-plus hit like I mentioned above.

On the question of whether you should keep contributing, the answer is absolutely. If you stop contributing now and then resume later after the market has recovered, then you're just buying mutual fund shares at a higher price than what's available now.

Remember, buy low, sell high. And right now, stock and mutual fund prices are the lowest they've been in a while.

So I understand the desire to maybe shift to more conservative investments, but stopping your contributions would absolutely be the wrong move. In fact, one way to recover from the current market is by stepping up contributions so you can buy even more of these cheaply priced shares.

Erika asked: "I am a 54-year-old, I had $100,000 in my 401(k) and now have $50,000 left. Would it be in my best interest to pay off my mortgage of $50,000 and then take that monthly $500.00 and start a new 401(k)?"

McPherson answered: Erika, I would not suggest using your 401(k) funds to pay off your mortgage. The primary reason is that at your age, you would incur a 10 percent early withdrawal penalty plus ordinary income taxes on the amount withdrawn. As I mentioned to others above, you could lose 40 percent or more of your remaining balance to taxes and penalties. That means after setting aside money for those, you would not have enough money left to pay off the mortgage.

If you have other funds available in a taxable account that could be used to pay off the mortgage, that might be something to consider. You would want to look at the interest rate you're paying on your mortgage and the number of years left on the mortgage.

If you're deep into the term of your mortgage, chances are most of your mortgage payment is going toward paying down the principal rather than interest payments. That would be another reason not to pay off the mortgage all at once.

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