The cost of 401k withdrawals and other options for emergency cash
HOUSTON - This tough economy is leading more people to tap their retirement accounts for emergency cash. But the short-term fix can mean a long-term loss for your retirement.
The Transamerica Center for Retirement Studies surveyed 5,700 workers at for-profit companies and found 30% had taken a loan on their retirement funds, and 21% had taken an early or hardship withdrawals.
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401k plan administrators reported a record number of hardship withdrawals last year, followed by Bank of America reporting a 33% jump in the first quarter of this year.
Hardship withdrawals must be for critical needs, such as medical care, or preventing foreclosure or eviction, tuition, or repairing a damaged home.
"But if you're younger than 59 and a half, and you take money out of your 401k, you will have a 10% penalty," explained Robert Gilliland with Concenture Wealth Management in Houston.
Others have turned to 401k loans, with interest rates one to two points above the prime rate, much lower than the average credit card rate, which is over 20%.
But many financial advisors caution you to avoid tapping retirement funds because you lose the opportunity for your money to grow. Bankrate outlines the pros and cons of 401k loans.
"Right now the S&P 500 is up 14.5%. So your portfolio would be up 14.5% if you have it invested in let's call it the S&P 500," said Gilliland.
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Withdrawing $5,000 from a retirement fund that could have grown at an average rate of 14% for 20 years could be a loss of $68,717.
Other options for homeowners include a home equity loan or a home equity line of credit. Just keep in mind defaulting can result in foreclosure.
More options include personal loans or debt consolidation loans.
"It absolutely makes sense to look at a consolidation loan, pull them all together. They're all in line, and it’s one simple payment," said Gilliland.
And for people concerned that they won't be able to save for retirement when federal student loan payments resume in October, the Secure 2.0 Act will let employers match an employee's student loan payments with a contribution to the employee's retirement fund starting in 2024.