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Texas Tech University

Tap your 401(k) to buy high-yield CDs?

Robert Powell
Special for USA TODAY
CDs offer a stable rate of return, but the problem it, it's low.

Q: I am 60 years old and my spouse is 55. I have about $300,000 in my 401(k), and my spouse has about $335,000. We both have military pensions and have earned income of $90,000 per year. Since I can withdraw money from my 401(k), is it wise to withdraw money to buy high-yield certificates of deposit? Merlina To, Westminster Md.

A: Without knowing more about your cash-flow needs, it's impossible to determine if any fixed-income investment is appropriate, says Harold Evensky, chairman of Evensky & Katz/Foldes Financial Wealth Management in Coral Gables, Fla.

However, assuming a short-term fixed-income allocation is appropriate, don't withdraw funds from your 401(k). "Losing the benefit of a 10- to 15-year 401(k) tax-deferred shelter will not be made up by investing in currently taxable high-yield CDs, says Evensky, who is also a professor of practice at Texas Tech University in Lubbock, Texas.

Consider: High yield might sound good on paper, but even with interest rates rising, the best rate on a five-year jumbo CD is 2.27% according to Bankrate.com.

What's the better option? "If you are concerned about rising interest rates it is very likely that you have access to a high-quality short-term bond fund in your 401(k)," says Evensky. "That would be a better alternative, again assuming short-term fixed income is appropriate for you."

Another financial planner concurs with Evensky's advice. "Your solid 'solid' base of retirement income is not license to take unnecessary risk with your savings," says Michael Lonier, the president of Lonier Financial Advisory in Ramsey, N.J. "You should strive as you near retirement to grow and protect your retirement savings."

His advice: If your 401(k) does not permit investment in a stable value fund, which can be a great alternative to a CD, and you are able to roll over some or all of your 401(k) into an IRA, then you would be able to invest in CDs in an IRA.

Like Evensky, Lonier says it's probably not a good idea to withdraw money now from a tax-deferred account and pay taxes to invest in CDs or anything else in a taxable account. "You should keep your savings growing tax deferred as long as you can while taking the appropriate risk the strength of your balance sheet allows," he says.

The one exception, Lonier says, is doing a conversion from a tax-deferred (401(k), 403(b), IRA and the like) account to a tax-free Roth account if this year you are in an unusually low tax bracket. "Opportunistically converting tax-deferred savings to tax-free (Roth) savings when your taxes are otherwise low has multiple benefits once you are in retirement," says Lonier.

Consider: Roth accounts continue to grow tax free, withdrawals are tax free, and Roth accounts are not subject to taxable required minimum distributions at age 70½ and beyond as are tax-deferred accounts.

Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal and MarketWatch and teaches at Boston University. Got questions about money? Email rpowell@allthingsretirement.com.

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