I cashed out my SIMPLE IRA
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!