Posted: May 9, 2008 09:16 PM
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| Chris Fickey | ||||||||
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| Mary Jo Harper | ||||||||
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| Rick Meigs | ||||||||
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NASHVILLE, Tenn. - It is the latest sign of the tough economic times: More and more people taking money out of their 401K plans.
It may seem like a lifeline now, but it could lead to major trouble down the road.
Chris Fickey, 26, is getting a jumpstart on saving for his golden years. He signed up for his company's 401(k) plan right after college.
"I do hope to save up enough so I can retire when I'm in my mid-60's," he said.
He plans to leave the money alone until retirement.
But today, a growing number of consumers are in such dire straits they're cashing out part of their retirement plans early through something called hardship withdrawal.
"With the increased unemployment rate, the downturn in home value and home equities, I'm pretty sure that that's driving a lot of those increases," said Rick Meigs, president of 401(k) Help Center
Experts said it's a troubling trend. With some of the nation's largest plan administrators seeing double digit spikes in cases.
"A hardship withdrawal is something you want to consider as your very last alternative to accessing money for a specific emergency," said Mary Jo Harper, financial advisor of Merrill Lynch.
In fact, by law, you can only qualify under certain financial hardships such as medical expenses, college tuition or potential eviction or foreclosure.
"The IRS and Congress don't want people depleting their retirement accounts for frivolous reasons," Meigs said.
Plus it will cost consumers.
Let's say you're pre-retirement age and in the 25 percent tax bracket. And you need to withdraw $20,000. Not only did you lose the opportunity to grow that money in your retirement fund, but you'll be hit with $5,000 in federal income taxes. Plus, you'll likely face an additional $2,000 in penalties for taking the money out early.
"You're only able to keep $13,000. Very, very painful. It sets you back on your retirement game plan even further," Harper said.
"I'm fortunate not to have to worry about that right now," Fickey said. "But, if the situation posed itself, you have to make a decision. You have to do what you have to do, right?"
Experts said hardship withdrawals are okay in the face of a true emergency. But consider, other options first such as taking out a loan from a 401(k) plan if the plan allows. You would have to pay yourself back, but "a loan faces no taxation and no penalties," Meigs said."
If you're not facing foreclosure, experts suggest homeowners consider refinancing since interest rates are down again. A home equity loan is another possibility.
"We'd recommend meeting with your financial advisor and looking at all your liabilities, looking at all your assets, shaking every tree possible, seeing if there's anything you can get before you do the hardship," Harper said.
Fickey is grateful he's not in trouble right now, but has comfort knowing his retirement savings are there in case of emergency.
"It would take some very serious circumstances for me to withdraw my 401(k) early," he said.
Not all retirement plans allow for hardship withdrawals, so, if you are in need of help, check with your administrator first.
