401(k) hardship withdrawals, loans up

[keepinitreal]

August 20, 2010

In the wake of news about a spike in new applications for unemployment benefits comes another potentially troubling sign: A record number of workers made hardship withdrawals from their retirement accounts in the second quarter.

What's more, the number of workers borrowing from their accounts reached a 10-year high, according to a report issued Friday by Fidelity Investments.

The trends reflect the financial stress many workers find themselves in as the economy struggles to find sure footing, said Beth McHugh, Fidelity's vice president of marketing insight.

High unemployment and companies cutting back on overtime or overall hours have reduced the take-home pay of many workers.

"People tend to be taking home less," she said. "As a result the percentage of individuals initiating hardship distributions is one of the things we're concerned about."

Fidelity administers 17,000 plans, which represents 11 million participants. In the second quarter, some 62,000 workers initiated a hardship withdrawal. That's compared with 45,000 in the same period a year ago.

What's also eye-opening is that 45 percent of participants who took a hardship withdrawal a year ago, took another one this year, McHugh said.

To be eligible for a 401(k) hardship withdrawal, individuals must demonstrate an immediate and heavy financial need, according to IRS regulations. Certain medical expenses; costs relating to the purchase of a primary home; tuition and education expenses; payments to prevent eviction or foreclosure on a primary home; burial or funeral expenses; and repair of damage to a primary home meet the IRS definition and are permitted by most 401(k) plans.

A key concern is that these withdrawals are just that, they are not loans. As a result there can be a significant impact on someone's overall retirement savings. If the worker is younger than 59 1/2, they'll pay a 10 percent penalty for early withdrawal in addition to taxes.

The average age of the workers taking hardship withdrawals is between 35 and 55, their peak earning years. It's also often a time when competing financial challenges emerge, McHugh said.

The good news in the report was that the average 401(k) account balance as of the end of the second quarter was $61,800; up 15 percent from the same time last year, but down from the end of the first quarter of 2010.

http://news.yahoo.com/s/ap/20100820/ap_on_bi_ge/us401k_economic_hardship;_ylt=Ag77abCONWonjMdbflS.tZ2s0NUE;_ylu=X3oDMTFmYTR0ajUwBHBvcwMxMDMEc2VjA2FjY29yZGlvbl9idXNpbmVzcwRzbGsDZmlkZWxpdHk0MDFr

[sophia]

The sad part is some of these people will eventually file Bankruptcy anyway and regret taking a loan or a withdrawal. We did the same thing and here we are 1 year after a closed BK still paying the loan back and wishing we had not touched the 401K.

[banca rotta]

The sad part is some of these people will eventually file Bankruptcy anyway and regret taking a loan or a withdrawal. We did the same thing and here we are 1 year after a closed BK still paying the loan back and wishing we had not touched the 401K.

I agree. What a shame.

I guess it doesn't really matter. Either they are going to borrow it and hand it over to the bank to save a house not worth saving or the eventual stock market crash will steal it anyway. It's too bad for these poor folks they don't have a good financial education to preserve some of their hard earned wealth.

[spidge]

I agree. What a shame.

I guess it doesn't really matter. Either they are going to borrow it and hand it over to the bank to save a house not worth saving or the eventual stock market crash will steal it anyway. It's too bad for these poor folks they don't have a good financial education to preserve some of their hard earned wealth.

Yeppers. I am one of those uneducated poor folks who thought was doing the right thing. I did a few hardships to pay for the mortgage in the last couple years and this year I have had some troubles but am determined to not take from my 401K again. I will also look for an alternative to locking up my money in anything like a 401K as when poop happens all my money is tied up in this account that requires proof of hardship to gain access. Some of us barely get by check to check and its risky putting money into such an account and not having a security account for things like transmission replacement or major pluming repairs. So I will have to learn to spread it around some to keep some more accessible.

Also, I am amazed that this is just now becoming news worthy. They did not see this before? How do they think people are getting by? If income has not grown for the private sector in over 7 years I wonder where we would look to supplement our incomes?

Oh, but then I am one of those little people who is not factored in until those who need me to buy their products and services notice that I am not any longer.

I'll get off my soap box now and make room for someone else.

[albacore44]

been there...........done that. before i was smart enough to pull my head out of the sand and admit i was sinking fast, I took out a 50K loan from my 401K and paid off some CC's. 6 month later i had to admit i was going under, and now my penalty is paying myself back a loan of $800 a month. boy i could sure use that extra money now.

[spidge]

been there...........done that. before i was smart enough to pull my head out of the sand and admit i was sinking fast, I took out a 50K loan from my 401K and paid off some CC's. 6 month later i had to admit i was going under, and now my penalty is paying myself back a loan of $800 a month. boy i could sure use that extra money now.

...and now after my loan is paid back to myself(!) I get to pass it to the trustee instead.

I thought you were attempting a strategic ch13? What changed?

[albacore44]

...and now after my loan is paid back to myself(!) I get to pass it to the trustee instead.

I thought you were attempting a strategic ch13? What changed?

no 13. discharged 7, about 3 months or so now.I was able to qualify for a 7

[Ann]

no 13. discharged 7, about 3 months or so now.I was able to qualify for a 7

Albacore, I could be way off here but was it you that was going to try and settle your second mortgage? For some reason I'm thinking you posted that here. If so how did it go? I'm about to withdraw from our 401k to offer to settle on my second. Yes, I can hear everyone saying it is a bad idea. But first let me say that we are not talking a huge amount. I'm talking between $3,500 and $5,000. If they agree to release the lien I can then stay in my home and be free of that lingering debt. $5,000 vs. $67,000...I think a small withdraw is definitely worth it. We were just discharged a few days ago so I'm going to start the process of cleaning up my credit report and write that settlement letter.

[albacore44]

Albacore, I could be way off here but was it you that was going to try and settle your second mortgage? For some reason I'm thinking you posted that here. If so how did it go? I'm about to withdraw from our 401k to offer to settle on my second. Yes, I can hear everyone saying it is a bad idea. But first let me say that we are not talking a huge amount. I'm talking between $3,500 and $5,000. If they agree to release the lien I can then stay in my home and be free of that lingering debt. $5,000 vs. $67,000...I think a small withdraw is definitely worth it. We were just discharged a few days ago so I'm going to start the process of cleaning up my credit report and write that settlement letter.

Yep it was me.5 months late on the 2nd, waiting for charge off. they keep sending statement. I keep not paying. No calls for about 2 months now. i still have money in the 401K for settlement.

[Flamingo]

Yeppers. I am one of those uneducated poor folks who thought was doing the right thing. I did a few hardships to pay for the mortgage in the last couple years and this year I have had some troubles but am determined to not take from my 401K again. I will also look for an alternative to locking up my money in anything like a 401K as when poop happens all my money is tied up in this account that requires proof of hardship to gain access. Some of us barely get by check to check and its risky putting money into such an account and not having a security account for things like transmission replacement or major pluming repairs. So I will have to learn to spread it around some to keep some more accessible.

Also, I am amazed that this is just now becoming news worthy. They did not see this before? How do they think people are getting by? If income has not grown for the private sector in over 7 years I wonder where we would look to supplement our incomes?

Oh, but then I am one of those little people who is not factored in until those who need me to buy their products and services notice that I am not any longer.

I'll get off my soap box now and make room for someone else.

This has been newsworthy several times in the past with major segments on TV about telling people not to touch their 401(k)'s and why due to all the tax and penalty implications. In the past, people working could not touch any pension money being saved for them by their employer. They only could touch money they saved in a savings account which they opened and put in after tax. Today, very few have savings accounts due to the low rate of return and put their money into 401(k)'s, etc., which came of age in the mid-1980s. Pensions went by the wayside as folks had to start saving for their own retirement with employers giving back a percentage, if any, of the percentage of funds saved by employees. During the boom years of the 90s smart folks utilized all this to their advantage and many ended up with the stock market and other savings being able to retire early and enjoy their windfalls. However, many just went in over their heads and with the additional income of the boom years went on spending sprees, getting loads of credit cards or loans to fund big houses, luxury items, etc., etc. Then comes the Tech Bust of 2000/2001, 9/11, and the events starting in 2006/2007 leading to today. Many folks had no savings accounts to fall back on but had 401(k)'s and started taking money out right and left to pay bills, live on, etc. not caring or worrying about the 10% penalty or how distributions would affect their income for the year putting them in a higher tax bracket. Jobs were lost and 401(k) loans had to be repaid in full or taken as a distribution. This is all still going on today as it is an available source of funds.

The major effect of all this will come over the next 20 years or so when folks start retiring, have to rely on SS only since they have no retirement savings, etc. Many will have to move in with children or family as they will not be able to survive otherwise on SS only. I am sure the homeless will increase. Multi-generational housing is now the big construction thing of the future due to all of this so families can live together and support each other as it becomes more expensive to live on less money/no jobs.

Good Morning America a few years back did a big segment on 401(k)s due to all the withdrawals taking place as the housing market fell and jobs were being lost. At the onset the first thing they said was to forget you even had the account and to keep contributing as much as you can, if possible, into the account. 401(k)s are long-term investment accounts for retirement. They are not savings accounts to take out funds as you need them. One is taxed on all distributions (state and federal) and there is a 10% penalty to list on the amount withdrawn on one's federal tax return on top of taxes taken out. If you take out $2,000 of pretax money saved, the penalty is $200 plus at least 20% for state and federal taxes have to be withheld. That's another $400. So that's only $1,400 one gets out of the $2,000. So many people, if they can, take out more over and above what they need to cover the taxes and penalty. When you actually have it in front of you as I indicate above, it is an absolutely awful thing to do and should not be done unless extreme hardship circumstances dictate otherwise and there is no other way out.

[spidge]

One of the biggest problems that you elude to in the last sentence of your post Flamingo is to only use in extreme circumstances. What is extreme? Most who feel they are at that point take the money out of the 401k thinking its only this one time and they don't realize its likely not to be the last time.

Looking back for me I should have filed BK years ago, but so many frown on it that I fought it until I bleed my account to a very low amount. Pride and fear were in the way the whole time. I now look at it as a tool that it is to prop me up for the future needs of my family now and the future. Major companies do it and yet they don't blink about taking anyones money and giving minimal services or crappy toss away products made with the cheapest labor in the world leaving the American workers hung out to dry with no income growth/spending power. I'll stop now.

[Flamingo]

One of the biggest problems that you elude to in the last sentence of your post Flamingo is to only use in extreme circumstances. What is extreme? Most who feel they are at that point take the money out of the 401k thinking its only this one time and they don't realize its likely not to be the last time.

Looking back for me I should have filed BK years ago, but so many frown on it that I fought it until I bleed my account to a very low amount. Pride and fear were in the way the whole time. I now look at it as a tool that it is to prop me up for the future needs of my family now and the future. Major companies do it and yet they don't blink about taking anyones money and giving minimal services or crappy toss away products made with the cheapest labor in the world leaving the American workers hung out to dry with no income growth/spending power. I'll stop now.

Extreme to most people means last resort; life or death situation; no way out and funds are needed to survive. All situations are different and one really has to take a hard look at their own personal situation as to what they need to do and how it will affect them in the long run. Unfortunately, we don't live in a perfect world and people are going to do what they want to do anyway and worry about the problems later or just say it is someone else's problem.