A new Bank of America survey shows that Americans are tapping into their retirement savings, pulling money out of their 401(k)’s at an alarming rate for emergency withdrawals. Yahoo Finance Columnist Kerry Hannon reveals that this may be indicative of a larger trend, saying, “This isn’t the first study that is showing us an uptick in people reaching into their savings for retirement.”Hannon explains the potential consequences of withdrawing from retirement funds and the importance of separating retirement savings from emergency savings accounts.
– Americans are tapping their retirement savings, pulling money out of their 401(k) at an alarming rate. Yahoo Finance’s Kerry Hannon is here with the details. Kerry.
KERRY HANNON: Hi. Yeah. I mean, the new study came out this week from Bank of America showing that the number of people who have withdrawn from their retirement accounts has ticked up something like 36% year to year. This is a big number. And it’s not just people who are withdrawing from their retirement accounts. The escalation of people borrowing from their retirement accounts.
Now it’s their money, of course. Why not? There are several reasons why this is a problem. But why is this happening? It’s happening, is it indicative of a trend perhaps? Vanguard has seen similar things with their funds, as has Transamerica. This isn’t the first study that is showing us this sort of uptick in people reaching into their savings for retirement.
And it’s happening a lot because of the financial stresses of inflation are sort of lingering. It’s coming to fruition right now. And people are facing very high credit card debt. And as we know, credit card interest rates are phenomenally high right now. And they’re just feeling that pinch of not being able to make ends meet.
So this is a source of money that they’re going to. So how does this work? All right. If you’re withdrawing from your retirement, account if you’re under 59.5, you are going to pay a 10% penalty, and you’re also going to pay ordinary tax on that money. Now there are some exceptions. The IRS says if you’re making that withdrawal for maybe a first home purchase or some medical expenses, that that will be excused for this. There are some higher education opportunities that you can use this money for without having to pay the penalty. You’ll still pay tax on it though.
And the people who are withdrawing and just taking the money out of their retirement accounts as a loan, they’re borrowing from themselves, this is not great, but it’s not terrible. Because what happens here is that you pay yourself back, and you generally have about five years to do that. And you pay it back with interest.
But that said, the money does go back into your retirement account. Now there is a caveat here. If you were to leave your employer while you have a loan, you may very well be asked to pay it back fairly quickly. That can be a problem. And if you don’t get it paid back within a certain time frame that your employer’s plan requires you to do so, it will be considered a withdrawal, and you’ll face those taxes as well as that penalty.
– Now Kerry, what are some other things people need to consider before withdrawing from their 401(k)?
KERRY HANNON: You know, you just take a breath. This should be a place of last resort because you don’t want to be using your retirement accounts as a savings account. So if possible, if you can have an emergency savings account, really work to build that up because this should be your last resort for a lot of reasons.
As I said, the borrowing from yourself isn’t as traumatic. But when you actually withdraw it, you are really setting yourself back for your future financial security because that money’s gone. It’s no longer gathering, compounding interest. You’re no longer automatically putting your savings in there necessarily. And it’s really gone for good.
And I got to say. I mean, on a personal note, I did this myself. When I was 29 years old, I took money out of my 401(k) plan to pay back credit card debt, right? And I regret that to this day because it wasn’t a lot of money. But when I think of if I left it alone over all these years, what that could have possibly amounted to at this point, it’s just staggering. And I just want people to really need to think it through before you tap into these accounts.
– Certainly very important advice there. Kerry Hannon, thanks so much.