Should I cash out my retirement account? At a recent women’s conference on agriculture, I encountered this question in several forms as people look for additional income. One woman had previously worked off the farm for 15 years where she built up a 401(k) account. Her husband suggested cashing it in in order to purchase additional land that would generate higher returns than an investment account. Obviously concerned, the woman wanted advice on the best course.
Well, in short, my answer was, “No! No! No!” In actuality, the answer is not that absolute, but does require some careful consideration. There are several questions to examine before making a decision to draw from or liquidate a long-term investment.
First, this lady was younger than 59½ years of age, which means she will incur a tax penalty for an early withdrawal off the 401(k). Next, one must consider the diversification of current investments. The old adage of “don’t put all your eggs in one basket” is still very applicable. In this situation, the couple has extremely limited investments that are independent from the farm. That fact makes the 401(k) and one other additional IRA their only other possible streams of income in their retirement years.
The next question to consider is whether the business historically paid income tax. Often, producers make every attempt to minimize the amount of taxes paid and sometimes, do not pay taxes at all. This approach, of course, limits the amount of Social Security and retirement for which either individual is eligible. In regards to retirement income and living, this is a red flag.
Another component to consider is amount of risk associated with an investment. Under current law, many retirement accounts have limited exposure in regards to business bankruptcy and legal action. These types of protections are another form of diversification and overall risk management.
Undeniably, farm land historically has been a solid investment with steady appreciation and in some years will generate dividends in the form of net profit. Again, the point of diversification must be considered. This is particularly applicable for females as they tend to live longer than males and are often responsible for both child and adult care which may limit their earnings prior to retirement.
In planning for retirement income, options and diversity are good. While perhaps my response to the question was not what this woman’s husband may prefer, thoughtful, careful consideration must go into such a strategic decision. Tax implications, other investments, as well as long-term plans and obligations each must weigh in on the decision. While seeking additional income, being creative and thoroughly examining all possible options are crucial aspects. However, remember to look ahead and not sacrifice tomorrow for today.
For more from Dr. Kohl, follow his "Road Warrior" blogs.