There are many reasons to stick with stocks in your 401(k)
— -- Q: I'm fearful the stock market will fall more. Should I pull out all my money from my 401(k) retirement plan and put it into a savings account?
A: Absolutely not.
Let me start by saying I don't know your individual situation. It always makes sense to have cash handy in a "rainy day" fund to make ends meet in case of a bad turn of events. Usually, you want six months of living expenses or more.
But taking money out of a 401(k) to escape the stock market seems risky. For one thing: Taking money out of a 401(k) means you will pay tax on it at ordinary income rates. Second, withdrawing money before you reach retirement age also results in a hefty 10% penalty in most cases.
According to the Internal Revenue Service:
"Distributions received before age 59 1/2 are subject to an early distribution penalty of 10% additional tax unless an exception applies. For more information about the treatment of retirement plan distributions, refer to Publication 575, Pension and Annuity Income." Read more here.
Even high-yield savings accounts are paying less than 3% now. And it would take four years of interest at 3% just to get your money back from the penalty.
Recent stock rallies are great examples of the danger of panicking. On Oct. 16, for example, the Dow jumped 4.7%. And the week ended Oct. 31, the Dow gained 14%. So, by staying invested, in a few days you recovered almost twice what you would have made in a full year in a savings account.
Could the market go down again? Sure. But these big upticks are the reward for being patient, and there will be more, probably when people least expect them.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns.
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