Retirement accounts are being destroyed.
A new study from Bank of America, which tracks employee benefit programs for nearly 4 million customers, shows that the number of participants who took hardship withdrawals from their 401(k)s increased in the second quarter and In comparison, it increased by 13% in the third quarter.
This is up to more than 18,000 plan participants, the highest level in the past five quarters since Bank of America began tracking this data, and compared to the number of withdrawals in the first three months of this year. It increased by 27%.
To be clear, while these numbers are on the rise, they still represent a very small percentage of total plan participants.
Taking out a loan from your retirement savings is definitely a quick way to move cash during uncertain times, but there are consequences.
“If you look at the data across 401(k) plans, financial hardship continues to be a factor,” Lisa Margeson, managing director of Bank of America’s Retirement Research and Insights Group, told Yahoo Finance. .
“Several factors may be at play, but the economic environment following a year of high inflation and rising costs of living may be influencing this continued trend.”
read more: Planning for Retirement: A Step-by-Step Guide
The average worker hardship withdrawal from a 401(k) plan in the third quarter of this year was $5,070, on par with the average withdrawal in the previous quarter of this year, according to a Bank of America study.
Borrowing from retirement savings also increased. The percentage of 401(k) participants who received loans from workplace plans in the third quarter was 2.5%, the same as the second quarter and up from 1.9% in the first three months of the year. .
Average loan amount: $8,530. This is in line with the average loan amount taken out in the first six months of this year.
The generation with the highest percentage of outstanding loans was Gen
However, loans from IRAs and IRA-based plans such as SEP, SARSEP, and SIMPLE IRA plans are not allowed.
read more: These are the new traditional IRA and Roth IRA limits for 2024.
“Things are starting to crack,” Carrie Carbonaro said. certified financial planner, told Yahoo Finance. “This is a direct result of the Fed’s rate hikes. We’re just starting to see the effects of the rate hikes, with auto loans at nearly 10%, mortgages at 8%, and credit cards at over 20%. Add inflation. .And with student loan payments restarting, budgets are being stretched to the limit for almost everyone except the very wealthy.”
Aftermath of attack on retirees
Of course, it’s the withdrawals that hurt savers the most, as early withdrawals come with heavy taxes and penalties.
Withdrawals from 401(k) accounts are generally taxed as ordinary income. He will also pay a 10% early withdrawal penalty before age 59 1/2 unless he falls into one of the IRS exceptions. These include certain medical expenses, qualified tuition payments, and medical expenses up to $10,000. first time home buyer. Some employer plans also allow for a no-hardship withdrawal.
For loans, it’s not a complete loss. Withdrawing the money from his retirement savings, he typically pays it back to himself with interest within five years. Loan payments and interest will be returned to your account. Depending on the employer’s plan, she can withdraw 50% of her savings, up to $50,000, within 12 months.
There is one caveat. If you leave your current employer, you may have to repay the loan in full immediately. If he is unable to repay the loan, he will be considered in default and will be subject to both taxes and a 10% penalty if he is under 59 and a half years old.
Financial professionals rarely help customers with their 401(k) plans until after 59 and a half years of hardship.
“Typically, taking out a loan from your 401(k) should be one of your last resorts, because the money you borrow won’t be invested and you’ll miss out on potential market value appreciation.” says Certified Financial Planner Ryan Heiss. Flynn Zito Capital Management Speaking to Yahoo Finance from Garden City, New York.
Another negative effect of using your retirement funds for short-term expenses is that by withdrawing cash, even for a short period of time, your retirement funds miss out on compounding interest on the amount you borrow.
“We still haven’t heard from many clients about withdrawals from their 401(k)s,” Heiss added. “Before investing, we strongly recommend that our customers build an emergency fund, which is equivalent to his 3-6 months of expenses.Of course, if an emergency arises, It’s a great place to raise money for.”
If a loan or withdrawal from a 401(k) is unavoidable, “you should try to continue making contributions as you repay the loan, especially until you are matched with your employer, if possible,” says Heiss. said. “Otherwise, you will be missing out on ‘free money’ from your employer.”
Kelly Hannon is a senior reporter and columnist at Yahoo Finance. She is a workplace futurist, a career and retirement strategist, and the author of her 14 books, including “The World’s Best.”Taking Control Even Over 50: How to Succeed in the New World of Work.” and “You’re never too old to get rich.” Follow her on Twitter @Kellyhannon.
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