Should I Take Money From My 401k Plan

Should I Take Money From My 401k?

“Should I take money from my 401k to help me get through these tough times?” That’s a question we received from a listener.  The CARES Act made some changes to these distributions.  But there are still some things you should consider. Let’s dig into the answer. (Read more below)

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It’s a tough time right now. We’re all trying to stay healthy. That has led to some very extreme measures. And those measures have created some financial hardships for people.

Mark sent us a question. He asked, “should I take money from my 401k to help me get through these tough times?”

How the CARES Act changed 401k distributions

Recently the federal government passed the CARES Act. It is a $2 trillion stimulus designed to help Americans weather this storm created by the Covid-019 virus.

One of the provisions of this act was to provide some tax relief for distributions from 401k plans and other retirement accounts like IRA’s.

Should I Take Money from my 401k

Normally, if you are under age 59 1/2 there is a 10% penalty for early distributions. The CARES Act now waives this penalty for those early withdrawals up to $100,000.

The act also allows you to spread the taxes from any of those distributions over 3 years.

Lastly, you can return those distributions to your IRA or 401k inside the three-year period as well.

Check Your With Your Employer!

Not every 401k plan allows for in-service distributions. Please check with your employer.

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But, should you take money from your 401k?

Now, this doesn’t answer Mark’s question. It shows that it is an option. Should you tap into your 401k (or IRA) to help you through these tough times?

Here are some things to consider?

Should I take money from my 401k

Your distribution is taxable…

The distributions are still taxable. Even though you can spread the tax bill over three years, and there is no penalty, there are still taxes due. Think of it this way, for every dollar you take out, at best you’ll only keep 85 cents.

You’re selling at lower prices…

The stock market is down significantly. Selling now, means you’re going to lock in those losses.

There is a future cost…

You worked hard to save it. Taking those funds from your account not only has a current cost, it has a potential future cost as well. You’ll miss out on the future growth. Over time that could be significant.

A last resort…

Withdrawing from retirement accounts should be a last resort. Unfortunately, a lot of people could reach those extreme situations. The government has at least provided a little relief if it gets that far.

Make sure you dig into your numbers before you make these tough decisions. If you need some guidance, talk to a financial planner.

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    

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The Best Reason To Not Sell Your Stocks Now

The Best Reason To Not Sell Your Stocks Now

If you haven’t sold your stocks at this point, you may not want to.  Sure, the market could drop further. But selling now could be a big mistake.  Today, I’ll share the best reason to not sell your stocks now.  (read more below)

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Why Sell Now?

The sole reason to sell stocks at this point is to keep your balance from shrinking further. We never truly know (in advance) where the bottom is. And we may not have seen the bottom of this bear market yet. 

Not Sell Your Stocks Best Reason
Click to Enlarge

But selling at this point could end up being a big mistake. Here is the best reason to not sell your stocks now.

Bear Market Math

The foundation of our reason is rooted in what we’ll call bear market math. How much return do you have to earn to recover all that was lost during the downturn?

The Best Reason To Not Sell Your Stocks
Click to enlarge

Let’s say the market only dropped 20%.  To erase the losses, you would have to earn 25%.

Right now, the current bottom of this bear market is about 34% lower than the all-time high. From that point, you have to earn 51% to erase the losses.

And if this bear turns uglier and drops say 50% from its February high, you’ll have to earn a 100% return to break even

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"Safe Assets" Offer Very Low Returns

Selling those stock holdings now and moving to the so-called safe assets can be a big problem.  In today’s environment, the potential future returns for those types of investments are very low. You might find a 6 month CD with a yield of 1%. 12 month CD’s are only slightly better. And we all know most of our savings accounts don’t even pay that much. Those low returns make recovering your losses very difficult—if not impossible.

And those prospects look even worse when you consider what happens to the shares of those companies immediately following the bottom of a bear market.

Catching the Rebound

This is our 15th bear market since the end of World War 2.  Here’s what happened following the bottom of the bear markets:

Click the graphs to enlarge

  • The average price increase 1 month after the bottom was almost 31%.
  • When we look 6 months out from the bottom, the average price gain was nearly 26%.
  • 12 months after the low point, the average price increase was 39%.
  • And 2 years after a bear market bottom, the average price increase was nearly 60%.  

And remember, this is only price increases.  It doesn’t factor in the additional returns from dividends!

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It Happens Early...

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This is interesting.  Prices one month from the bottom were higher than they were 6 months later in every single recovery.  A major portion of the recovery happens very early.  Missing out on that could have a significant impact on your future.

These gains may not have erased all the losses in any of those bear markets. But the surge immediately following the bottom helped those who stayed invested–even if their accounts fell further—recover a lot faster than if they moved to “safer havens.” And this is the best reason to not sell your stocks now.

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3 Things You Need to Know About Bear Markets

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  • Define A Bear Market
  • Share 3 things you should know about them.
  • Offer 4 ideas you can use to improve your future.
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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.  This is now his 5th bear market.  Unfortunately, it won’t be his last.

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Avoid These 4 Big 401k Mistakes in 2020

Avoid These 4 Big 401k Mistakes in 2020

One of the biggest factors in your long-term financial success is avoiding the big mistakes. Unfortunately, we see many of the same common errors that—over a person’s career—can cost thousands if not hundreds of thousands of dollars. Try to avoid these 4 big mistakes in your 401k in 2020

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Mistake 1: Not Maximizing Your Match

Many employers will match your 401k contribution.  If you put money in your account, your employer will too.  We typically see that amount range between 3% and 6% of your pay. 

Unfortunately, we see people who won’t maximize their employer’s match.  Not only are you not receiving all the pay you should, the long-term impact on your nest egg can be huge.    

Mistake 2: Not Saving Enough

Most financial planners suggest you should try to save between 10-15% of your pay for your future. In fact, the amount you save is the biggest factor in your long-term success.

Unfortunately, we see people who limit their savings level well below that. Often times, people will cap their savings in their 401(k) at the point where they maximize the employer match. For most of us, this probably won’t be enough to have the type of retirement we want.

Mistake 3: Not Pursuing Growth

A Nobel Prize winning economist once did a study that showed financial losses feel twice as bad as financial gains feel good. As a result, many people get more conservative with their savings than they should. This means they don’t put enough money in stocks.

Not being aggressive enough can lower your returns over time.  This actually adds more risk to your long-term plans.

Mistake 4: Withdrawing Money From Your 401k

Whether you change jobs or take an in-service distribution, withdrawing money from your 401k gets very expensive.

Most times we see this when people change jobs. Instead of rolling their balance to an IRA or their new employer’s plan, they withdraw the money. This results in taxes, early withdrawal penalties, and the loss of future compounded growth.

If your plan allows for in-service distributions, the costs will be similar.  Most of those distributions will be taxed and penalized.  The penalty applies when you are under age 59 ½.

How Much Will These Mistakes Cost?

How much will these mistakes cost you?  The numbers can be shocking.  The longer you have until retirement, the bigger the cost.  We have a special webinar where we illustrate the potential cost of these 4 mistakes. Click on the button to watch.

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

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Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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