"In most cases, you'll have annual income in the year you withdraw simply because you can't live without it (and they probably didn't fire you on January 1st). You'll probably be odd-jobbing in exactly the profession you used to have a steady job in and earning roughly the same income but without benefits and by working more hours. In which case you *will* pay income tax on that withdrawn money on top of the 10% penalty which will give you a return of less than zero. And if we're talking a larger amount -- if, for example, you really wanted to get your hands on the 50 grand you had saved now that you now desparately need -- it will be much worse and hurt like hell.
It doesn't invalidate your argument, but it makes it less of a no-brainer. It simply underlines what you say later on, that you shouldn't invest money long-term that you might need soon."
Which is pretty much what I was arguing, given the context of the question: the current outlook. Jordan left out one other factor: the current outlook for equities: not good.
Everybody in my office who had $ in a 401k that was not in money markets lost 50% of their money in the crash. Didn't matter what they were invested in. Since the lows, they've made up some of the losses, but it ain't over yet. And, you know, these are smart computer professionals......
Making real money on investments is for insiders and those who can take a lot of time to study and play the markets. Hard to do if you have a full time job and family -- unless that is your full time job.
I think that 401Ks are a scam. Allbeit, a brilliant scam. And right now I think your best be is to stay as liquid as possible.
Joanna