So Now They Tell Me — o​r Whatever Happened to My 401(k)?

Recent stock-market declines have affected virtually every sector of the economy, but the impact on retirement accounts has been the most worrisome for many people.

Retirement accounts have lost about $2 trillion over the past two years due to market declines, according to Congressional Budget Office estimates.

But don't despair!

There are steps you can take now to protect your remaining savings, according to the Pennsylvania Institute of Certified Public Accountants.

For many years, investing in stocks or stock mutual funds seemed like a surefire way to make money and expand savings of any kind, including retirement portfolios. For that reason, many people who are in retirement or within a decade of getting there have kept a large portion of their nest eggs invested in the stock market.

As a general rule, that's not the best investment choice.

Stocks are a relatively volatile investment, meaning that their prices can rise or fall a great deal in a short time. As a result, CPAs generally advise near-retirees that it's important to reallocate their assets by putting more money into fixed investments, such as bonds or money-market mutual funds. That way, you protect yourself against sudden losses that can occur when the stock market goes sour.

Tax rules require that you begin taking required minimum distributions from your retirement accounts by April 1 after the year in which you turn 701/2. For retirees whose retirement savings are invested in the stock market, that means that to get the distribution, they will have to sell stocks or cash out of stock mutual funds that may have declined significantly in value during the past year.

Once Gone …
But, remember, once a losing investment is sold, a retiree has no chance to recoup the losses.

Late last year, a new law was passed that offers some relief. Under the Worker, Retiree, and Employer Recovery Act of 2008, you do not have to take the required minimum distribution from most retirement accounts in 2009. This applies to 401(k) and 403(b) accounts, as well as traditional individual retirement accounts, among others. In other words, you are not forced to take required distributions on those losing investments.

The distribution law is one of many factors to consider in handling distributions from a retirement account. To learn more, you should talk with a trusted financial adviser to make certain that you're fully informed about your options.

But what should you do if you really need the money now, and you're not at retirement age yet? What about the risks of borrowing against your plan?

Tapping into your retirement plan may be an acceptable step, but only in the absence of other borrowing options.

Although you never want to deplete your retirement savings, a retirement plan loan can have an advantage over other borrowing options. First, instead of paying interest to a lender, you will be paying interest to yourself. In addition, the interest rate on such loans is typically lower than what you would pay on credit-card balances or other commercial debt.

While there is some benefit to a retirement-plan loan, there are also many important disadvantages. One major drawback is that you lose the investment potential of any money you borrow.

Let's say you have $5,000 in a retirement plan, and during the coming year that investment will earn 5 percent, or $250. If you borrow that $5,000 from your retirement plan, then you miss out on the chance to earn the $250.

Potential lost earnings are, therefore, considered a "hidden" cost of this kind of loan.

After weighing the slight advantages to the many disadvantages, you may still decide that you need to tap into your retirement plan funds. If so, remember that with any tax-advantaged retirement account, it's significantly better to take a loan rather than withdraw the funds outright.

You can get more information about retirement — and details on a wide range of other financial issues — from the consumer section of PICPA's Web site at:



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