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IRA or Vacation?

Chris Farrell Jan 10, 2008

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.

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