Disclaimer: i had the following thoughts w/o benefit of knowing all the specifics of your situation.
A) i'm not a tax expert but i'm having trouble imagining a scenario where you would be allowed to deduct the 10% 5329 penalty on ur 1040. Not only do you pay the 10% penalty, unless the entire amount represented a capital loss, you also end up paying tax on that money at your regular earned income rate, which could be as much as 35% on top of the ten(and because it's part of your AGI u also pay state taxes where applicable), depending on your bracket. the other "cost" you incurred by taking your money out of a qualified plan is that from '99 forward, any increase in value was then subject to cap gains. but maybe u have very creative tax advisor.
B) what did u do with the money since '99? real estate? the truth is all investment comes with risk, and in this ecomony you can't point to ANY investment sector that hasn't retracted. if you want a pat on the back for timing the market to avoid the recent drop, you were about a decade too early. i don't feel entitled to gloat over not giving all my money to bernie madoff, and i also don't see how bailing out of all ur retirement plans in '99 could have been a good idea, from any POV.
PS: yes the market WILL rise again, and it's not dead by any means.
Very good questions:
Yes, all investment comes with risk, but in my life time I've been much more secure with investing in assets I can touch, insure, renovate, and lease. I never worried about investing in the 401K's offered by my employers because I was never in control of the money. But once you quit a job and don't have the option of transferring a 401K to another company, you end up converting it to an IRA. I had several. Plus, as a self-employed person I had a KEOGH for a while. But the year I cashed them all in was also a time when it was legal for me to take that penalty as a deduction. I don't know why. You'd have to ask my CPA.
As for real estate: I ended a long post in the universal health care thread explaining that after I slam-dunked my GED (in 1967) I took Real Estate evening classes offered by the California State university I attended while carrying a full school load during the day. Working as a bartender in the gay bars of San Francisco during the 1970's was great work and paid extremely well in tips, until the IRS decided they needed to tax tips. Don't university students still work as bartenders, waiters and waitresses these days?
I still recommend (and think it's really dumb not to) for everyone thinking about buying their first home attend real estate school. You don't have to do it to become your own Realtor. But the information imparted in real estate schools is an enormous asset to have when house shopping. However, I got my first Realtor's license while I was still an undergraduate and was able to sell homes in the 1970's when it was one of the absolutely the worst times in the history of US real estate to think of real estate as a career. In that decade, mortgage rates were commonly 18% and NO ONE could afford to get into a home without at least 15% to 25% of the down payment in cash -- unless you bought HUD home. I helped a lot of friends and colleagues get into their first HUD home during those years. Still, mortgages were steady at about 15% to 18% into early 1980, when they finally started to become reasonable again. But in my case I would have never been able to accomplish what I have without having worked part-time in real estate most of my life. However, not everyone is cut out to work (especially honestly) as a Realtor.
I'm not Warren Buffet. And many will advise EVERYONE NOT TO INVEST IN REAL ESTATE, but someone is. I have and still do. But it requires a great amount of attention to detail. You need to understand the inherent risks when buying your first home. Few do. Notice all the foreclosures in the USA? You also must be willing to not be greedy. For people in my position, the USA real estate market is ripe for picking. For others who profess powers beyond that of a Magic 8 Ball, the stock and bond markets seem like the only "sure" long-time investment. Others are addicted to gambling in the commodities exchange.
I like to walk around and touch the stuff that churns in a regular annual income for me -- even in these "uncertain economic times." There was a time I had an investment portfolio -- apart from any IRA/401K/IRA when I had more than 10,000 shares of AmEx that surprisingly split - three ways. That's the only account I kept for any length of time until those shares had worked their way back to the $50 range (three or four years after that split). Then I dumped that stock as fast as I could, paid the capital gains (which used to be quite fierce) and reinvested that money in things I understood better. Personally, I have no alpha male interest in monitoring P/E ratios and speculating in companies or corporations.
I remember a time when all my coworkers were spending more time (mid 1990's) watching their index funds in a separate window on their office desktop monitors than doing very much work as software engineers. We all shared in the cost for a Morning Star subscription and had "The Bob" and "The Non Bob" investment clubs named after a great coworker and friend who convinced us it would be fun to have a small investment club at the office. Bob's track record wasn't the greatest, so another coworker started the Non Bob fund, of which Bob was also a member. After a couple of years I realized I was wasting too much energy doing my semi-weekly homework assignments on potential fund investments (besides, Wal-Mart was the only dependable, regular steady peformer, followed by furniture outlet chains). During this same time, in comparison, my rental income properties were slogging along making a regular turtle-paced profit that easily surpassed the annual income from my full-time job.
There are posters who will tell you that I don't know what I'm talking about. Which is fine. And most people who work full-time for someone or something else have no other recourse for investing and hoping they have enough money for retirement except for a 401K. Of those 401K's I wonder how many employers are currently continuing to match a percentage of their employees' semi-weekly or monthly investment?
Like I said, it worked for me (I'm 59) and supposedly "retired." I cannot imagine what my life would be like if I hadn't taken control and responsibility for my own financial future -- starting back in 1969. Had I depended upon the miracle of compounding and fabulous Wall Street to get me where I am today, I'd most likely be working as a greeter at Wal-Mart just to eat.
As I mentioned in my other post I was seriously goal-oriented to be "retired" at 50 when most of my friends were just hoping to be mortgage-free at 50. If anything, over the last 40 years I've had more people try to take advantage of me while I've kept myself clean and legal in all of my business transactions. Sorry about that.