One of Suze's long-held principles is to never take money out of a 401(k) until you retire. Tracee, who says she's been hit by the recession, wants to know why she can't remove $5,000 to help her during these hard times.
"A 401(k), which is a retirement account, is not for a rainy day," Suze says. "It is for your life during retirement. And if you take money out of a 401(k) to save yourself for a day, you are going to give up possibly a lot of money during your retirement life."
Suze explains why taking money out of a 401(k) isn't worth the small payoff. "When you take money out as a withdrawal, you will pay ordinary income taxes and a 10 percent penalty. On a $5,000 withdrawal, after taxes and penalties, that will leave you with approximately $3,000."
On the other hand, if Tracee keeps that $5,000 in her 401(k), at average market returns the payoff is great. "It would be worth $35,000 in 25 years. In 35 years, it would be worth $81,000. In 45 years, it would be worth $181,000."
Since Tracee is in a tight spot right now, Suze has advice for a quick fix. "You do what's called an IRA rollover," she says. "You take your money that's in the 401(k) and do a rollover [into] an IRA account. Then, once it's in that account, you can take out the money you need …as long as you put it back within 60 days." If paid back in the time allotted, Suze says you will not pay taxes or a penalty. "You can do that once a year. So you now have this money, you can give yourself a short-term loan, and if you pay it back in 60 days, great. If you don't, you will owe ordinary income taxes on it and a 10 percent penalty."
Carlos and Teresa have been watching their mutual fund lose money and now disagree on what to do next. "When we first invested this money, we agreed we were in it for the long haul, so I want to ride it out," Teresa says. "We understand the market can go up and down, but in the long run, our investment should give us a decent rate of return we can rely on for our retirement. We've invested in mutual funds that have performed well historically, and I have faith in the system." Carlos isn't so sure.
Suze says to pretend the money invested in the mutual fund is cash. "Let's say you have $40,000 in cash right now," she says. "Would you right here and right now take that $40,000 and buy what you already have that money in? Would you buy that same mutual fund? Would you buy those same stocks? If the answer to that question is, 'No, I would not,' then you sell. If the answer to that question is, 'Yes, I would,' then you keep it."
If Teresa and Carlos still don't agree, Suze says to sell only half of the money in their mutual fund. "Why do you have to be an all or nothing investor? Why is it that you always have to do 100 percent of everything with your money or do nothing with it?"
Suze says investing their savings all at once was Teresa and Carlos's first mistake. "In markets that are in turmoil, you never, ever put a hundred percent of your money in one lump sum," she says. "The correct thing that you should have done is you should have taken the money you put in, let's say it's $60,000, and you should have divided it by 12 and invested $5,000 every single month. That way, when the market went down, your money bought more shares. If the market went up, your money would have bought less shares. But the truth of the matter is, you would have averaged your dollars in the cost of it and you wouldn't be down as much as you are right now." Ken Paves and his celebrity friends give big for a good cause See who went home on Oprah's Big Give
Take charge of your money
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