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This is why you should keep your hands off your 401(k) during market downturns

Though economic uncertainty is plaguing the market, here’s why this is why you should keep your hands off your 401(k).

Michael Burry warns of impending financial crash
ANGELA WEISSGetty

As economic uncertainty begins to plague markets, those with retirement savings invested may worry that they’d be better off withdrawing their money early from a 401(k) or Roth IRA. However, pulling funds from private retirement accounts like these can come with fees that make such a move unwise—especially for workers who aren’t set to retire for another decade or more. Before making any decisions, it’s wise to consult a financial planner with fiduciary responsibilities to ensure the advice you receive aligns with your best financial interests. Unlike other financial planners, a fiduciary is bound by law to put your interests first above what may be the best way for a bank or holdings company to secure its bottom line.

Be aware of any early distribution penalties

According to the Internal Revenue Service, early distributions from “most retirement plans” incur an additional tax penalty. This penalty typically stands at 10 percent, and the IRS defines an “early distribution” as any withdrawal from an IRA or retirement plan before age 59½.

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The ebb and flow of the market provides little comfort

While a downturn may temporarily reduce the value of your retirement portfolio, history suggests it could recover over the long term. Still, this possibility offers little reassurance to those who’ve spent years diligently contributing to these accounts. Additionally, as some workers learned during the 2008 recession, an economic downturn can destroy, or at a minimum, significantly setback one’s retirement savings.

Compounding the issue, pensions—where benefits are determined by factors like employer—union negotiations—are increasingly rare, leaving private retirement accounts as the primary savings option for many workers.

For those seeking stability, there’s always the option to invest retirement savings in safer assets, such as government bonds, though these typically yield smaller returns compared to company stocks. Some fund managers allow workers to adjust the risk level of their portfolios. For example, McLean, a retirement planning institution, published a blog post recommending that younger workers take on riskier investments early in their careers, then gradually reduce risk as they approach retirement to avoid significant losses.

That said, the blog post includes clear disclaimers to protect against accusations of providing poor financial advice. While it argues that younger workers might benefit from riskier portfolios, it also cautions that “past performance is not indicative of future results” and emphasizes that the content is for “educational purposes only,” not as an offer to buy or sell securities.

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