The Sky is Falling…Or Is It?
Q. I have taken a 50% hit on my 401(k) account this year because of the market contraction. I’m thinking of just pulling all the money out and investing in a rental property instead. Is this a good idea? I live in the southwest where real estate has really dropped anyway. I’m not 59.5 yet either. I am in the 35% bracket.
A. Now that is a very defeated person! Anyone who has the slightest bit of risk in their portfolio, 401(k) or not is taking a big hit. The media is pumping a “doom and gloom” scenario and this frankly scaring everyone into some really bad decisions. Let’s take a step back and look at this from a numbers perspective. I think once we get through this, that you will see how much this would cost you.
Let’s just say that your 401(k) had $500,000 in it before the market began tumbling. That would mean you are down to $250k now. If your withdrawal is not for some very specific reasons outlined in the tax code. Your company’s plan document may limit even further what is considered to be an acceptible withdrawal reason. Because you have not reached the age where you can have access to your funds, you will get a 10% penalty right off the top. Your tax bracket will sap another 35% of this money. If the trustee does not withhold the tax portion at withdrawal, you will owe this on your tax return. Keep this in mind to limit your exposure to underpayment penalties.
Let’s look at what you have left: $250k less 45% is $137,500. Ouch! Can you actually buy a house for that amount that you is worth puting into the lease market Are you prepared for the headaches of the landlord title? Even landlords are having trouble renting out homes now because of the down market. Can you make enough back to fund your retirement in the future owning 1 house? I submit to you that unless you own several houses, the headache of renting a home to a lessee is simply not profitable or worth the trouble.
Although these are dire times, your best bet just may be to hold tight and see what the market can give back to you. We’ll talk about that in a future post.
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