- Americans are increasingly plundering their retirement savings, according to a Vanguard survey.
- This could be a sign of financial distress for consumers under the weight of high inflation for 40 years.
- Advisors warn that this may not be the best way to get quick cash.
Americans feeling the pinch of high inflation are plundering their retirement savings, an ominous sign for a country already struggling to save for old age.
The share of workers withdrawing money from their employer pension plans in the form of new loans, non-hardship withdrawals and hardship withdrawals have all increased this year, but “of most concern is the increase in withdrawals for difficulties,” according to Vanguard Group, which tracks five million savers.
People can tap into their 401(k) plans to borrow up to $50,000 as a loan to pay back into their account, or make a hassle-free withdrawal while they’re still working for their business. But if they withdraw money without valid and serious financial need (that would be a difficult withdrawal), they will likely pay a 10% withdrawal penalty, and the IRS will likely withhold 20% of the amount withdrawn for taxes.
The Robinhood game:Robinhood IRA Offer: 1% Retirement Savings Match
What is a 401(k):What happens when you resign or are fired?
The share of those who made troubled withdrawals from their 401(k) retirement plans in October hit 0.5%, the highest level since 2004, when Vanguard started tracking the data, it said. he declares.
Hardship withdrawals are often the last resort for people in need of cash, and this could be a sign of the extent of consumer financial distress. They are only allowed to cover “immediate and significant financial need,” according to IRS rules, and are subject to income tax and, potentially, a 10% early withdrawal penalty. For a hardship withdrawal of $10,000, for example, taxpayers in the 22% bracket would have to pay $1,000 in penalties plus $2,200 in income tax.
“We know inflation has eroded employees’ purchasing power and is likely putting pressure on family budgets,” said Tom Armstrong, vice president of analytics and customer insights at Voya Financial., a pension, investment and insurance company.
And without emergency savings, the fallback plan is often a retirement nest egg. According to data from Voya, employees without adequate emergency savings are 13 times more likely to make a hard withdrawal and three times more likely to take out a loan from their retirement plan.
Higher retirement savings ceiling:The IRS is raising the 2023 retirement savings cap, but few have even reached it. Here’s what you can do about it.
When you’re short on cash, is tapping into retirement savings a good plan?
Not if you can help it.
“While we understand that in some cases individuals may have no choice but to tap into their retirement accounts, it’s important to remember that people work hard for their retirement savings and should be drawing from them. as a last resort,” Armstrong said.
A difficult withdrawal can give you immediate access to money, but it has significant financial impacts. Not only do you have to consider the immediate taxes and penalties, but also the longer-term implications for retirement.
You may not be able to contribute to your retirement plan at work for six months or more, and you could lose the compound growth of your investments, said Nilay Gandhi, senior wealth adviser at Vanguard. Compounding makes your money grow exponentially because you earn a return on both your initial investment and the returns you previously received on that investment.
When you must:Is it still okay to dip into your retirement fund? Here are 3 cases where it makes sense.
But if you need to tap into your retirement savings, you might want to consider these two options first, says Gandhi:
- A loan from your 401(k). If your plan allows loans, they must be paid back into your retirement account, so you pay yourself back and don’t lose money. The money is also not taxed if the loan meets the rules and the repayment schedule is met, the IRS said. Note that loans are capped at 50% of the acquired account balance or $50,000, whichever is lower, unless half of the balance is less than $10,000. Additionally, “we warn you that these funds are taxed and penalized if you are unable to repay the loan and become payable if you quit your job,” Armstrong said.
- Withdraw money from a Roth IRA. Because you’re contributing to a Roth IRA with money you’ve already paid taxes on, qualified withdrawals of your contributions are tax-free and penalty-free at any age.
How can I access cash without withdrawing my retirement savings?
Before turning to cash-for-retirement savings, consider some of the following options first:
- Savings. Unforeseen expenses are exactly what emergency savings are for. So if you have any, this should be the first place you turn.
- Bank loan. If you have a one-time expense and good enough credit to qualify for a low fixed interest rate, a personal loan might be a good option for quick access to cash.
- Home Equity Line of Credit (HELOC), if you own a home. You use your home as collateral to get a line of credit you can draw on. You only pay interest on what you withdraw, and the interest may be tax deductible if the money is used for home improvements. Beware though that they often have variable fees and interest rates, and the Federal Reserve is currently on an aggressive rate hike cycle to slow inflation.
- Additional work. “If you are able to accept part-time work. many companies are still looking for people at attractive hourly rates,” Gandhi said. These days, there are also a number of side businesses that people can do from home, such as selling goods on eBay or Etsy.
- Credit cards with 0% interest on purchases. “You can use one of these specials for 12 to 18 months to cross the bridge, accordingly,” Gandhi said.
- Traditional brokerage accounts. Even with most investments down this year, there may still be a few winners you can cash out. The money will be subject to capital gains tax, but if you have losses you may be able to sell these investments and apply them to your gains to reduce your tax bill.
- Flexible and Health Savings Accounts, if your cash needs are to cover health care costs.
- Borrow from family and friends.
Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and sign up for our free Daily Money newsletter for personal finance tips and business news Monday through Friday mornings.
#tap #retirement #savings #Cashstrapped #Americans