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IRA or Vacation?
Question: Ten years ago, I left my previous employer with a 401K worth $2,500 and invested the money in an IRA. Its value at the time of this e-mail is around $3,100. In my opinion, that's a very low return. In your view, should I just take the money, pay the penalty and take a vacation? Or should I leave it alone? Mr. Angel, Milford, NH
Answer: I'd rather you leave it alone. Sure, it hasn't grown much. But thanks to the power of compound interest it will add up if you leave it alone. For instance, $3,100 earning a return of 5% annually over 20 years is worth $8,225. The same figures compounded over 30 years equal almost $13,400. Those aren't huge sums, but a little bit here and a little bit there eventually add up.
Still, the main reason it doesn't pay to withdraw the money to pay for a vacation is that you'll owe Uncle Sam income taxes, plus a 10% penalty. Ouch.
Chris is right not to take the cash now to avoid the penalty, etc but have Vanguard or Fidelity take the money (to avoid the penalty) from the 401k trustee and put it into an IRA Rollover account or if you are young enough, pay the tax and penalty and put it in a Roth IRA. Then you can invest it in different mutual funds and get a far better return. Learn how to invest (fool.com) and then put the IRA into a brokerage acct and play the market. If you add $4500 yearly to your Roth and get a 14.5% return (small cap sector of the market), that account will be worth almost $2 million in 30 years and you will only have put in $135,000.
