I cashed out my SIMPLE IRA

By Stew

retirement-cropped

I am not a financial advisor, nor do I play one on the internet. So the following story is not necessarily an example for anyone to follow. In fact, you might find a conflicting piece of advice right here on this blog. The coming months and years will tell if I made the correct choice.

I cashed out one of my IRA accounts last week.

It was a Simple IRA from a part-time job. I have not worked for this particular employer for over a year and I am not likely to work there again. The account was held by Vanguard and my experience with that company was positive.I hope to invest there again, if I ever have the opportunity.

Most financial advisors will tell you to never cash out a retirement account before the age at which you can avoid fees – you should probably listen to those advisors. I know that my actions fly in the face of conventional wisdom, but here are some of the factors in my decision and you can tell me if I made the right choice:

Fourteen months ago, this particular account was worth almost $3,000. On the day that I called to cash it out, it was worth just over $1,800.

Because I cashed out before the age of 59 years, six months, I will pay a 10% IRS penalty on the value of the account.

Since my contributions to the account over the past five years were “before tax” dollars, the cash out will be counted as income against my 2009 tax return. This is not a big deal since I have almost no income tax liability anyway, so the redemption will only reduce my refund slightly.

If I could still contribute to the account, I would have kept it, but SIMPLE IRA contributions can only be made as payroll withholding. I could no longer add to this investment

The SIMPLE IRA was invested in two different mutual funds. Both had an annual fee of $25 apiece.Fifty bucks a year is no big deal if the value of your account is $5K or $10K or $40K, but a $50 fee placed a de facto load of 2.7% on my account. Unless the mutual funds did better than 2.7%  every year, I was losing money.

The real loss was in the number of shares that I held in the two mutual funds. Those shares had doubled in value and then lost that value during the time that I held the accounts.

From the big picture perspective, we broke even on this deal. Ultimately, the market drop and the ten percent penalty only represent the approximate value of my employer’s contribution to this fund. It is tough to look at all the money that we left on the table , but the reality is that we actually recouped all of our original investment.

Right now, our family budget is as tight as it can be without adding debt. We are currently meeting all of our expenses each month, but if we hit a snag with car trouble, doctor bills or some other unexpected financial challenge, our only option will be to charge up our credit cards. And there is nothing I hate worse than paying credit card interest. The money that I will get from the cash-out currently represents about half-month’s worth of expenses. The Simple IRA has become our emergency fund.

It is too early to tell if I made the correct decision or not. Possibly, in ten years, I will wish that I had left the money alone. On the other hand, there is no guarantee that the account will be worth a significant amount in the future. The market would have to come back in a huge way in order for this small account to overcome the fees and the lack of contributions.

I think the bottom line is this: God promised to meet our needs and he kept his word. Six years ago, when my employer asked if I wanted to start contributing to a Simple IRA, I thought the purpose was start working on my retirement nest egg, but He knew we would need this money during a cash crunch in early 2009. I would like to save more for retirement, but it isn’t possible right now.

Right now, I do not see how we will have enough money to support my wife and I in retirement. While I am committed to finding a way to restart our retirements, the reality is that I do not need to worry about it. God met our needs today and I have more faith than ever that He will meet our needs forty years from now.

I have another even smaller Roth IRA account that I might also cash out in the next couple of months. Maybe you can “Monday morning quarterback” my decision. Feel free to offer an opinion, advice or a rebuke. Fire away!


55 Responses (including trackbacks) to “I cashed out my SIMPLE IRA”

  1. The Weakonomist Says:

    This was probably a bad decision but since I don’t have any advice on what you could have done better I can’t tell you it was a stupid decision.

    Instead I’ll wish you the best of luck with getting your financial house in order in the coming months.

  2. ABCs of Investing Says:

    I would have suggested waiting until you actually needed the money before cashing out. If you really need the money then cashing a retirement fund is not the end of the world, especially considering the small amount.

    I do take exception to your statement “I do not need to worry about it” with respect to saving for retirement. This is ridiculous – you have to worry about it (although maybe not right now). If you think God or the government or anyone else is going to help you if you don’t help yourself first then you might be in for a disappointment.

  3. Stew Says:

    Weakonomist, I honestly do not think that a) we could have met our commitments over the next few months without this money and b) I can’t see how the fund would have ever grown again because of fees and lack of contributions.

    ABC’s, you may have misunderstood me a little, I do not need to worry from the standpoint that God has promised to meet my needs. He has done so too many times in tha past for it not to be true. This does not mean that I will never again start contributing to retirement. I believe it is important to prepare as well as possible for the future.

    Retirement contributions are not possible for us right now – other than social security.

  4. Luke Says:

    Stew, a lot of people will probably chime in to tell you why this was a bad decision. However, few people have been where you are standing-I have. I understand your rationale. Over time, as your income increases, and your expenses hold steady, you’ll be able to put that money back. Hang in there!

  5. Wealth Pilgrim Says:

    I am sorry you are struggling right now. I appreciate your honesty very much. It inspires me.

    I agree w/Luke. In a vacuum, maybe it wasn’t the very best move – but as you’ve described it, I don’t know what else you could have done.

    I also agree w/Luke,,,,,hang in there!

  6. Gina Says:

    Well Stew, considering all the circumstances (esp. the one about you cannot add any money to it), I agree with your decision and would have done the same thing.

    I’ve come to realize that investing/retirement is not “one size fits all” but that is what we’ve been told for the past 20 yrs.

    I have a friend (32 yrs old) that did the same thing last year. Only her acct was $25k and it was a IRA. She cashed it out and paid off all of her debt. I’m still not sure that was the best idea but she says the freedom she feels from not having debt was worth every penny. Now she set a monthly amt to be deducted from her paycheck to contribute to a Roth IRA.

    We sincerely appreciate your honesty! Keep your chin up – God will provide.

  7. Stew Says:

    Gina, thanks for that story . . . if my account had been 25K, I’m not sure that I would have been as quick to pull the money out. However the possibility of debt freedom would be huge.

    If my wife and I were to enter retirement with no debt, we might be able to live on very little money. I think.

  8. Erin Says:

    Dear Stew, I wholeheartedly agree with your decision, regardless of the “shoulds” in life. The truth of the matter is that our situations change, our priorities change, and our realities change. years ago, I pulled out the money I had in my 401K to buy our first house. I was told I was crazy, that it was a terrible decision, etc. The truth is, it was a perfect-for-us decision. We bought a fixer-upper house at the bottom of the market in 2000 , through a ton of money and sweat into it and sold it at the very tip top of the market in 2005. Did I mention we were in So Cal? Even after calculating in the money we spent on additional taxes to get the money, the opportunity to buy that house set us on a path that allowed us to leave So Cal and move to a place we’re more suited to. I have never regretted making the decision to pull that money out. Now, I have regretted the decisions we’ve made that got us into debt, but that is a different post, isn’t it?

  9. Travis @ CMM Says:

    I think what you did was ok. Sure, you might miss out on some money had you waited another year or two, but the stress relief is probably worth it. Plus, having an emergency fund will keep you from using those credit cards I hate so much.

  10. Diane Says:

    Bottom line is we all make our decisions and then we live with them. Sometimes, we have regrets later, but you can only do what you believe to be right at the time.

    I’ve been in a position of cashing out an IRA valued at $5K, due to circumstances beyond my control. We needed the money to buy a used car, as I’d had an accident that totaled our car and we had no collision insurance at the time.

    It was an awful time in our lives financially, our business (only source of income) was failing, our house had flooded and we had no flood insurance so we were living on bare concrete floors with 2 small kids. A perfect storm of disaster in our lives, mainly due to decisions made by my ex-husband, which I could not control.

    I look back and think maybe I could have found another way, but truly at the time it was a matter of survival. I used the car to get a part-time job, and another part-time job, which finally turned into a full-time job where I’m still employed today.

    I got out of the marriage, which was an absolute necessity, due to his refusal to deal with our financial situation, which continues to this day.

    I still don’t have much retirement savings, but I’ve raised 2 sons mostly on my own, I managed to keep our house (nearly paid for now) and pay off all the debt. I’ve finally worked my way out of that disaster, and it all started with getting transportation.

    So my belief is, do what you have to do now, and continue working toward something better. It’s obvious to me that you’re doing that, so I think you’re on the right track. Again, hang in there!

  11. MyJourney Says:

    Stew,

    I completely understand making moves despite knowing they are bad moves (I closed a BofA credit card just cause they pissed me off despiting KNOWING it was my oldest CC and highest credit limit).

    Notwithstanding, I have to say you made the wrong move. The account was there, right? Do you have an emergency right now? Nope. Why not leave it in there knowing it was earmarked for an emergency? Depending on the emergency you may have been able to avoid the 10% penalty (Google: Hardship Withdrawal).

    Just some thoughts.

  12. mb Says:

    I can see your point in making the decision. w/o seeing all your personal numbers, I can’t say whether it is something I would do… but it sounds reasonable given the information you gave. It sounds as though this cash is going into an emergency fund. Would you be able to roll some of it over into another investment in the near future for a new retirement fund? good luck and God bless.

  13. Kate Says:

    I really like what Gina said about investing not being “one size fits all”. Although you are worried about having enough to retire upon right now, I think the name of your blog says it all about the type of strategy you can employ to make a real difference. To make it manageable, gather little by little, and use the power of small to slowly build your savings, increasing your contributions when you can. With a little faith and a little effort, you can do it!

  14. Stew Says:

    Thanks for the feedback, everyone. Stay tuned, I’ll let you know what happens . . .

  15. JeffrO Says:

    I say, tough decision, but you made the right call. 10% penalty is only $180, $50 of which was your next annual fee anyways. Your best source of financial growth is your income generating occupation. With some ingenuity and hard work, you can make another $1800 faster than that $1800 could have doubled. Thank the Lord for your health and family…He will provide opportunities for you to grow the nest egg again.

  16. Kristy @ Master Your Card Says:

    Stew,

    I think this was a poor decision, to be honest. I understand your point about not having enough money, but with regard to the fees, I think you’re using that as an excuse to justify your decision. You could have rolled that Simple IRA over to the Roth IRA. It would be a conversion and there’s some paperwork, but it would have gotten you out of the fee’d account. You’ve now put yourself in a position to cement that $1200+ loss.

    Now, with regard to your money situation, was there not a second job you could pick up to start earning a little income while you sort through your financial affairs? I’m not saying that’s the easiest option, but it’s better then cashing in a retirement account that only covers half a month’s worth of expenses anyway. I think the better use would have been to roll it over and let it recover from the market drop and then you put a little more effort into your income with a part-time job. I know that sucks, I’ve been there; however, sometimes it’s a necessary evil.

    I don’t mean to come across preachy or wholly negative. I do understand your reasoning to some degree, but I think some of this is just an excuse and you could have found a better way around it. Regardless, I wish you the best and sincerely hope that you are able to work out a consistent retirement plan. It is something you should worry about.

  17. Dave Ramsey Jr. Says:

    Stew, I understand. Sometimes we have to do what we have to do. But I did the same thing about 2 years ago and paid off my debt and then after that our company closed their doors. I was glad I withdrew the money and also sad. We have to remember that it is only money and not an arm or leg that can’t be replaced. Money can be still be deposited or replaced next year or two. If my son had to have an operation that was not covered under my med plan, I would do it in a minute. You see it is not JUST about making our money grow. Don’t sweat the small stuff, and money is small stuff in the big picture.

  18. MyJourney Says:

    Everyone keeps telling him that it was an a move he had to do for his family….which I get – and everyone is probably right.

    But can someone (or stew himself) explain why he hasn’t (hopefully he googled them after my first comment) checked out Hardship withdrawal rules OR explain why not leave it in there UNTIL the emergency actually happens?

  19. Stew Says:

    As far as your first point, I was not aware of any hardship rules. I will check them out – good suggestion. As far as your second point, it is true that we have no immediate emergency, but we have circumstances that leave us with a $1200 hole in our monthly budget.

  20. Funny about Money Says:

    Hm. Given the small size of the IRA, it doesn’t sound like cashing it out was a disastrous idea.

    You might want to try to keep the Roth IRA if you possibly can, because (assuming the Gummint doesn’t change the rules on us) its terms are a lot more advantageous to savers and their heirs.

    Can either of you pick up a second job or some freelance income to at least help make up that $1200 shortfall?

    As for the future, remember: God helps him who helps himself. Better to rely on your own devices than on Providence.

  21. Matt Keegan Says:

    You made the right choice for yourself. Certainly, not everyone will agree but when it comes to your personal finances, God and your family, you have to do what is right for you.

    I had to take similar action a few years back, it was the only choice that I had. These days, a lot of folks are struggling and probably thinking the same thing. After carefully praying about it, I would to the same again if I had to.

  22. Stew Says:

    Thanks for all the comments, folks. This thread will be very informative to anyone who is considering cashing out an IRA account.

  23. Michael Says:

    I’m sorry that you cashed out. I would have suggested that you roll the Simple IRA to an IRA and convert it to a Roth. Then you would reduce expenses by consolidating accounts, although you would have paid taxes on the converted amount. The market has come back about 20% lately and you might have benefited from the advance. Also, the poor market performance should not be a reason to cash out and pay more. Just move the mutual fund money into money market to protect the balance for awhile, if needed.

  24. Betsy Says:

    Stew,

    I think your decision is FABULOUS. Here’s why….

    I gather from your blog entries that you are not careless, thoughtless, or “prayer-less” regarding your money. I get the impression that you take it very seriously and include GOD in your decisions. You sound as if you seriously weighed the pros and cons of this decision and knew that negative ramifications could certainly take place.

    When others say, “Rembember: God helps those who help themselves”, rest assured that you DO help yourself! You inform yourself, explore the possible outcomes, think wholistically re: your current family situations, and you pray. What more can you do? In another comment, someone suggested relying on yourself rather than Providence. Yikes. GOD is GOD. And he’s a good one. He knows what he’s doing. If this is how he led you, it was the right decision.

    BLESSINGS to you!

  25. Beth Says:

    You are right. GOD *will* provide for you. You honor Him and He will honor you. I know this to be a fact because He has done this for me many, many times… including today.

    I think you made a GREAT choice. You did what you felt you needed to do at this time and GOD will bring the rest together. You are not being slothful or impetuous. The Lord honors the fact that you have made the decision you felt was right for your family and He has a way of turning EVERY little thing out for our good, so be encouraged. We don’t always take the “right” path as man would see it, but our GOD has a way of making every winding road straight for those who love Him. Be encouraged and watch Him work on your behalf. I trust and believe for you. Be anxious for nothing. So be it done unto you.

  26. Dave Ramsey jr. Says:

    Where is it written in the Scripture “God helps those who help themselves”? I don’t think scripture says it that way!

  27. MoneyEnergy Says:

    Usually I would say it’s a bad idea, but as you said, if you had to pay a $25/annual fee on each fund just to keep them – that’s crazy! I probably would have cashed it out too.

    Do you know about DRIPs? You could take that 1800 and plop it into a no-fee DRIP and just let it reinvest itself. I’d trust that way more than any mutual fund.

    Just keep plodding along… even if you fall off the horse, just get right back on as soon as you can.

  28. DDFD at DivorcedDadFrugalDad.com Says:

    I would have done a rollover . . .

    Did $1,800 REALLY help you out right now? I could understand $18,000 making a difference if you were hard up, but $1,800?

  29. Michael @ The Life Insurance Insider Says:

    You can roll the money back into another IRA that you setup and control by the end of the year and you won’t have to pay the penalties.

    I wouldn’t have just left it there but I wouldn’t just cash it out either.

  30. Phil Says:

    I think you did the right thing. Given your tight financial situation at this point, especially. And it’s not like it was a huge chunk of money.

    You can take money out of a Roth IRA without any problem if you only take out what you put in (ie. you can’t take out any gains).

  31. Stew Says:

    This is all very interesting for me to read and like I said before, I can’t be sure that this was the right decision for the long term. I am, however, certain that this was the correct decision for the short term.

    Ramsey jr. – nice

    Dependence on God does not mean that we are to sit around and do nothing. It’s not like welfare. ;) God often provides in ways that we don’t expect, that is no reason to reject sound advice and hard work.

    DDFD – this money did help us out a great deal, right now it is the only thing keeping us from a zero balance in our savings and checking accounts. I think my next option would have been to leave a balance on a credit card or start to raid my children’s ING accounts . . .

    Phil – I was not aware of that option, if our financial situation improves before the end of the year and there is a good chance that it will, I will certainly consider reinvesting this money.

  32. Mark Says:

    The early withdrawal penalty for simple IRA that were made less than 2 years ago is 25%- NOT 10%. That changes things, doesn’t it?

  33. MyJourney Says:

    @Mark,

    WOW! I just checked my handy tax facts and you are 1000% correct under IRC 72(t)(6)!

  34. Cathy Says:

    If you did it for the right reasons, then you did the right thing. People often put a blanket rule like ‘never cash out your retirement early’. If it’s a matter of survival, then you need to do what you need to do. If you’re not in a position to take care of your needs now, then you won’t have a retirement. Take care of your financial house now, then you can work on retirement goals. I understand your reasoning, and I would have done something similar.

  35. Dianne Says:

    I understand your desire to get out from under fees that eat up small earnings. About three years ago I, too, had a small IRA that incurred fees annually. This was originally set up as a spousal IRA for tax purposes; I was not working at the time and was unable to make annual contributions. Because of the negative impact these fees had on the very small investment, I decided to roll it over to an IRA simply invested in a one year CD with no fees. Now that I am working with earned income, I thought I would start putting some money into it because of the great rate (4.5%) and keep it as my emergency fund. I am already age 60 and could close the account without penalty any time if needed.

    However, I was dismayed to read your comment, “Simple IRA contributions can only be made as payroll withholding.” This IRA is not through my employer. Does that mean I cannot contribute to the account?

  36. Lois Says:

    Hindsight is 20/20, but we have to deal with the here and now. We must choose what is right for our family, our circumstances, and our conscience. Since you made the decision after much prayer and research, I think you did what you should do. Everyone has a different comfort zone, and only you have a total awareness of your family situation. At this point in time, many people are making different choices because of financial situations. As someone said, God helps those who help themselves, and you did what you felt you needed to do to help yourself.
    Take care and God bless.

  37. Dianne Says:

    I think Stew may have done the right thing here. I don’t see how he could have rolled over the IRA since it is with his employer. By cashing out his IRA, he not only has cut his losses but also has ready access to the money when needed. I say this because of the relatively small size of the investment. Stew, you weighed the pros and cons and made a decision appropriate for your situation.

    As for my IRA, I’ve just answered my own question. The SIMPLE IRA you refer to here is a “Savings Incentive Match Plan for Employees”. What I have is a Traditional IRA. I guess I better get busy and find some extra money to build this emergency fund. I believe it’s best left where it is since I can draw on it at any time if needed and the interest is as good as it gets right now.

  38. Peter Says:

    I just did the same thing. I know what it feels like. Crummy, but it was either that, or not pay my employees, or take on more debt, which I am refusing to do. The next cash crunch? I laid off my highest paid employee.

    My simple IRA had reached over $10,000 in 2.5 years, and I cashed it out at under $5000 1 year later.

    I think you did the right thing. If you don’t refuse to go into more debt, or into debt at all, you will get in the habit of going no where and increasing responsibility and stress, and in my particular career, the clients don’t value what I do enough to make debt-investments work long term (well, they demand the latest and greatest, but are much less willing to pay for it) — and the stress lies on my shoulders without the means to pay it back.

  39. Stew Says:

    Wow, Peter, your situation sounds worse than mine.

  40. Sarah Says:

    At Vanguard, if you had rolled your SIMPLE IRA over to an ordinary IRA and chosen electronic service, you would have avoided annual fees altogether. With only $1800 in your account now, you would have had to go into the STAR fund, but there are worse funds to be sure.

    I’m not saying you made the wrong call, but it doesn’t sound like you really researched your options carefully (you might have done even better at a place that doesn’t have the relatively high Vanguard minimum). It sounds like you wanted the money as an emergency fund and you would have taken it anyway. Which might be the right choice for you, but it’s better to be clear about your motives in your own mind.

  41. Barbara Says:

    I agree with the decision to withdraw the IRA! We did the same thing a couple weeks ago for different reasons. Many say one should never withdraw a retirement account prematurely, but sometimes it does make financial sense…we all have different circumstances to deal with.

    The frightening thing about this post is Stew´s blind faith that God will provide for his retirement. God gave us choice and wisdom so that we could take care of ourselves to the best of our ability, so to disregard that in favor of dependence on Him is not right. I sincerely hope Stew decides to plan for his future and set money aside, or he will probably be very sorry.

    Good luck Stew!

  42. ZemoG Says:

    I just did it too. I am rolling over 5k and cashing 3k to pay my credit cards. Well I had 20k las March. And start my emergency fund.
    You have 60 day to roll it over to a IRA account without penalty or taxes. Not until the end of the year. The SIMPLE IRA has a penalty of 25%.
    I am hoping to put some money back to the new IRA account i have 50 day left. Visite my page and leave a note.

  43. Cheryl Says:

    I’m with DDFD. If you are in the hole $1200 each month, this money is simply a band-aid on a gushing wound. Most importantly, what is your plan going forward? You have only one choice as I see it: Increase your income or severely cut your budget. Sell anything that’s not tied down.

  44. Stew Says:

    We own a home in another state . . . we might sell it in the next month or we might do a deed in lieu in June.

  45. Angie Says:

    Did you consider transferring the balance to an IRA? You could have done that. Also, why didn’t you wait until you ‘needed’ the money before cashing it in, instead of giving some (even a small amount) to the government for no reason? And you realize you bought high and sold low? Nothing seems smart about this decision.

  46. Anon Says:

    Many blessings to you
    I wish you all the grace to deal with the challenges

  47. Jake Says:

    I think what you did goes against everything ‘they’ tell you not to. However, I am beginning to think that what you did is 100% right. Especially if you have outstanding debt. The Bible says “owe no man anything” and “you are a slave to your lender”. I have ~14,000 in an IRA, and I am considering cashing out just to pay off my CC’s and pay off some of the mortgage. Remember those cute little graphs all the mutual funds have in their prospectus (turn $10,000 to $50,000 in 10 years?) I think it’s a joke. We are living in times where the dollar is just a piece of non-backed paper. Pay off debt, live in your means, and you will never regret it.

  48. Charles Says:

    It seems that you gave this some thought……I’m not sure if you made the right call or not. I stuggle with the concept of saving for retirement when I am struggling to manage my current debt.

    I try to have the attitude that I am going to work and plan for the future attempting to make the most of what God has blessed me with; but with the faith that God will take care of my daily needs regardless of the good or bad decisions that I make.

  49. Станислав Says:

    А вот интересно, а сам автор читает комментарии. Или мы тут сами для себя пишем? :)

  50. Leon Says:

    I am currently thinking of cashing out my small amount, $4000. I have an investment opportunity come my way and I believe it will make me more money than my 200 plus shares are making me right now. Before the RECESSION it was worth nearly $8500………I googled “cah out simple IRA” and your blog came up…..good luck to you and your family.

  51. A Says:

    I just cashed mine out, too. Three months ago, it was worth over $3000. Today, it was worth about $1700. What’s the point, if it’s losing money? At this point, it’s probably serving me better as a month’s rent & a little bit of emergency cash. I’m still wondering how it lost so much so quickly, though.

  52. Dan Says:

    I find it interesting I stumbled upon this site. I thought about cashing in my IRA back in 2008. I held off. I have regained my losses, but still feel like I should cash it in, and use the money to prepare for the future. Financially I am doing okay. But truly believe the market is set for another major crash that we will not recover from. Spiritually I believe we are headed on a down hill slide, and we are to prepare for that crash.

  53. David Howell Says:

    My Story,
    Where in the world did we get this idea of retirement anyways? It is a non Biblical fantasy of the American dream. We will all slow down and be less productive as we age but if we live with in our means and don’t borrow money we don’t need to pay for things we don’t have to have we will be just fine.
    I have always work hard since I was young and when the IRA,s came up I took advantage of these deposits because of the tax benefit not because I ever intended to retire. Now that I’m 59.5 I am going to take it all out and used this money to help finance my company so I’m not dependent on the people who are slow payers or the banking systems.
    We who know the Living God through Jesus Christ his son are not living for all the gusto of this life, we are living for another age. DAVID

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