Cash Out IRA?

October 16th, 2008, by

Q: I have a well-diversified IRA and was wondering if I should put my money into something safer, given the current problems with the market. Would it be beneficial for me to move some or all of the money to a money market account or a CD? What would be the pros and cons of doing this?

–A Viewer, Gainesville, Virginia

A: Unless you are near retirement, or retired, you shouldn’t move all your money out of your IRA right now. And if that were your situation, you may not want to do that because you would lock in losses, given the staggering stock market declines.

If you have many years before retirement, and you have a diversified retirement plan, don’t panic. Right now, a lot of people are rushing to pull their money out of the market and stash it in cash. In the first six days of October, investors pulled $19 billion out of mutual funds that invest in United States stocks.

But in addition to locking in losses, you also expose yourself to inflation. In a low interest savings account, such as a money market account or CD, you’d actually be losing the value of your money over time because of inflation. And, in case you don’t know, inflation is a sustained increase in the prices for goods and services. If you don’t keep pace with inflation, your money today won’t buy the same goods in the future.

Inflation has averaged about 3.24% over the past 20 years, according to the Bureau of Labor. In the last year, it’s run between 4% and 5%. Most savings accounts don’t pay that much in interest.

Unless you invest to get some growth on your money, inflation will eat up the after-tax returns you earn.

So, as long as you continue to stay well-diversified and have a long time to wait for the market to recover, I wouldn’t cash out that IRA.

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Last modified: April 18, 2011 at 2:31 pm