The rough economy is taking its toll and pushing a record number of people to take money out of their retirement plans.
“I would say the No.1 reason is foreclosure,” said David Wray, president of the Profit Sharing/401(k) Council. “What you have is two-income families, one person loses their job. Both people’s income was necessary to make the mortgage payment.”
In fact, July marked the 17th consecutive month that foreclosure activity exceeded 300,000 homes.
Beth McHugh, vice president of marketing insights at Fidelity, said that’s a key reason more people are tapping their 401(k)s — an uptick from about 20 percent to almost 22 percent.
“In the last six months we did see an up-tick in loan requests to prevent eviction and foreclosure,” she said.
There are two ways to pull money out of 401(k)s. One is to simply borrow from your own savings.
“401(k) loans are very easily accessible compared to any other kind of individual credit to this point,” Wray said. “It’s more available and the interest rates are far lower.”
Even better – it’s your money.
“So rather than borrowing from a bank or putting the amount on a credit card, you’re actually borrowing the money from yourself and as a result you are then paying yourself back,” Fidelity’s McHugh said.
And at much lower interest rates, Wray added.
“The typical 401(k) plan interest rate is prime plus one, so it’s much lower than 14 or 15 percent, which is what you would pay in a credit card.” he said.
Or even what a bank would charge.
The other way to tap your 401(k) is through what is called a “hardship withdrawal.” Hardship withdrawals are really the last resort and for individuals that have a heavy and immediate financial need,” McHugh said.
Hardship withdrawals are regulated by the IRS because the money in a 401(k) has never had taxes taken out.
The IRS allows withdrawals for avoiding foreclosure, college tuition, unforeseen medical expenses, funeral expenses and finally, to help purchase a primary residence.
But the recipients have to pay taxes on any withdrawals, as well as a 10 percent penalty. That may be why only 2.2 percent make hardship withdrawals.
So having a sizeable 401(k) can help participants get past tough a rough economic patch.
But experts note that with government living beyond its means, more and more Americans need to save more in their 401(k)s.
“We’re talking about people living for 30 years after they retire,” Wray said. “There’s just no way that you can rely on government programs to support you during that entire period.”
And don’t forget many employers help by kicking in a contribution of their own, not to mention the savings accumulate tax free until they’re taken out.
Experts emphasize it is just too good a deal to pass up.