Many Americans who don’t have an emergency fund are using up their retirement savings to make payments.
That’s not surprising. This trend has been gaining momentum for several years. But that doesn’t mean you don’t have to worry.
Craig Copeland, director of benefits research at the Employee Benefits Research Institute (EBRI) in Washington, D.C., says, “One-time financial events, such as major car repairs or unexpected illness, can destabilize a household’s finances. I’m just shocked,” he told Yahoo Finance.
That’s bad news. The good: Help may be on the way, courtesy of the federal government.
First, some background.
Taking out a loan from your retirement savings is one way to get cash quickly. However, that’s generally not the first place people look. When faced with a spending spike, three in five households increased their credit card debt and then took out a 401(k) loan, according to a new study. report By EBRI and JPMorgan Asset Management.
Read more: What happens if I only make the minimum payment on my credit card?
That said, 17% of people who faced an unexpected bill used funds for a 401(k) plan loan, compared to 17% of people who faced an unexpected bill, according to research from EBRI and JPMorgan Asset Management. The rate is 7% for people with no expenses.
The study used data from records of 29 million Chase households and 11 million 401(k) plan participants from 2016 to 2020.
According to the report, a whopping 9 out of 10 households experienced at least one spike in expenses over the course of the year that was beyond their current income. One in three households experienced at least one spike in spending that exceeded income and cash savings. For her 3 out of 4 households with incomes below $150,000, an increase in expenses of more than $2,500 cannot be covered by income alone.
Of course, there are consequences to using your retirement savings for short-term spending rather than long-term savings. The main drawback is that workers lose the compounding effect of their retirement benefits when they withdraw them, even for a few years.
This can be appealing in a pinch. And for most people, a loan from a workplace plan is a better option than a bank loan or high-interest credit card debt.
Depending on your employer’s plan, you can withdraw 50% of your savings, up to $50,000, within 12 months. With a loan, you borrow money from your retirement savings and pay it back to yourself with interest, usually within five years. Loan payments and interest will be refunded to your account.
There is one caveat. If you quit your current job, you may have to repay the loan in full fairly quickly. If you are unable to repay the loan from your tax-deferred account, you will be responsible for paying both taxes and if you are under age 59 1/2, he will pay a 10% penalty.
A big reason why retirement plan borrowing is on the rise is because people have nowhere else to turn. Nearly a quarter of consumers have no savings at all. Emergency, according to the Consumer Financial Protection Bureau. And that’s the problem with unmanageable credit card bills and people borrowing or making early withdrawals from retirement accounts.
Read more: How to find out your Social Security COLA increase in 2024
But starting next year, many American workers will be able to take advantage of new employment benefits meant to help them save for those unexpected expenses.
In 2024, SECURE 2.0 law It will introduce provisions to help employees grow their emergency savings while saving for retirement. Employers may offer non-compensated employees the option to link their retirement plan to an emergency savings account.
For the 2024 plan year, employees with income of $150,000 or more in 2023: got a big reward According to the IRS, employees. That amount changes every year.
Eligible workers who participate in a defined contribution retirement plan, such as a 401(k), will be able to add an emergency savings account, a designated Roth account to set aside contributions. Contributions are limited to $2,500 per year (or a lesser amount set by your employer).
You can withdraw your funds at least once a month, and the first four withdrawals of the year are tax- and penalty-free. Additionally, you do not need to provide proof of a qualifying emergency.
Depending on your plan’s rules, your contributions may be subject to an employer match. Once the limit is reached, additional contributions can be directed to the employee’s defined contribution plan or deferred until the balance falls below the limit, at which point they can begin contributing again. The IRS is expected to provide additional guidance regarding these accounts by the end of the year.
“A financial cushion can prevent a pattern of families having to take out more credit card debt or loans to cover expenses,” Copeland said. “SECURE 2.0’s emergency savings provisions can make a huge difference to the finances of families, especially those living paycheck to paycheck.”
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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