MINNEAPOLIS — This is a sign of the times. High inflation and rising costs of living are causing more Americans to dip into retirement savings to make ends meet.
Fidelity Investments releases a quarterly retirement report. Here, analysts examine trends in 45 million active retirement accounts.
The company’s third quarter report It turns out that more Americans are using their retirement accounts to pay their bills.
Data extracted from the report shows that 2.3% of retirement account holders took out new hardship funds, 2.8% applied for a new loan against their 401(k) account and 3.2% withdrawn their account. I made an early withdrawal.
These numbers only include new withdrawals and loans, meaning they do not include ongoing loans. Regarding ongoing loans, Fidelity said 17.6% of the retirement accounts it manages still have open loans being repaid.
“Obviously it’s a big concern,” financial adviser Grant Meyer said.
Meyer owns GTS Financial in the Twin Cities.
He said 401(k) loans can be a lifeline for struggling families, but other options should be considered first.
Before tapping into a retirement account, Meyer said account holders should first look at savings accounts. Meyer said if you don’t have any savings left, consider withdrawing money from your Roth IRA account.
Meyer said funds deposited in a Roth IRA account can be withdrawn tax-free and penalty-free because taxes have already been paid.
Meyer says if you don’t have a Roth IRA, your next option could be dipping into a 401(k). He explained that withdrawals from the account can be done in three different ways. For one, if your 401(k) plan allows for loans, you can borrow money and pay it back over time.
Meyer said that’s usually the best option.
“We may be able to take out a loan to cover the shortfall,” he said. “The great thing about loans is that you pay them back yourself.”
Meghan Hannon of Bouley Financial Advisors said the next best option is to make it harder to withdraw from a 401(k).
“While some 401(k) plans don’t allow loans, many do allow hardship withdrawals, and this is an option people should consider,” Hannon said.
Hannon said that when making hardship withdrawals, account holders must consult a 401(k) plan advisor and must also provide documentation that the funds will be used for an emergency. Ta.
“There are eight or nine categories that the IRS lists as emergencies that may allow for a difficult withdrawal,” Hannon explained.
These situations include medical expenses, death in the family, and possible eviction or foreclosure.
Hannon said that in the case of hardship withdrawals, account holders still have to pay taxes, but in most cases they can avoid the 10% early withdrawal penalty.
So a third option is possible. It’s an early withdrawal from your retirement account.
Both Hannon and Meyer said this third option should be an account holder’s last resort, and that early withdrawals are subject to tax if the account holder withdraws funds before age 59 1/2. He said there would be a fine.
Hannon says all three options come with risks. That’s because they all take money out of retirement accounts that are meant to help account holders prepare for their actual retirement.
“When you borrow money from your 401(k), that money isn’t on the market. You could be missing out on investment returns on your retirement savings, so you want to be aware of that,” Hannon says. he says.
Meyer said another option for families facing hardship is to consider a HELOC (home equity line of credit).
“Using the equity in your home can earn you 8% or 9% or more interest, but it’s much lower than credit card interest rates, so it’s better than taking on a lot of new credit card debt. It’s a good option,” Meyer said.
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