- Americans are increasingly raiding their retirement savings, a Vanguard survey shows.
- This could be a sign of consumer financial distress under the weight of 40-year high inflation.
- Advisors warn that this may not be the best way to get quick cash.
Americans feeling high inflation are raiding their retirement savings, an ominous sign for a country already struggling to save for old age.
The share of workers receiving cash from employer retirement plans as new loans, non-hardship withdrawals and hardship withdrawals has increased this year, but “of greatest concern is the increase in hardship withdrawals,” according to Vanguard Group. which tracks five million savers.
People can dip into their 401(k) plans to borrow up to $50,000 as a loan that will be repaid in their account or make a hassle-free withdrawal while still working for their company. But if they are withdrawing money without a valid and serious financial need (that would be a hardship withdrawal), they will likely pay a 10% withdrawal penalty and the IRS will likely withhold 20% of the withdrawal amount for taxes.
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The percentage of people who experienced hardship withdrawals from their 401(k) retirement plans in October reached 0.5%, the highest level since 2004, when Vanguard began tracking the data, he said.
Hardship withdrawals are usually a last resort for people who need money, and this could be a sign that consumer financial distress may be deep. They are only allowed to meet an “immediate and pressing financial need,” according to IRS rules, and are subject to income taxes and potentially a 10% early withdrawal penalty. For a $10,000 hardship withdrawal, for example, taxpayers in the 22% bracket would owe $1,000 in penalties plus $2,200 in income taxes.
“We know that inflation has eroded employee purchasing power and is likely putting pressure on family budgets,” said Tom Armstrong, vice president of client insights and analytics at Voya Financial., a retirement, investment and insurance company.
And without emergency savings, the fallback plan is often retirement eggs. According to Voya data, employees without adequate emergency savings are 13 times more likely to take a hardship withdrawal and three times more likely to take a loan from their retirement plan.
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You can’t help it.
“While we understand that in some cases people 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 dip into them as a last resort,” he said Armstrong.
A hardship withdrawal can give you immediate access to cash, but it has significant financial impacts. Not only do you have to consider the immediate taxes and penalties, but also the long-term retirement consequences.
You may not be able to contribute to your workplace retirement plan for six months or more and could miss out on compounding growth on your investments, said Nilay Gandhi, senior wealth adviser at Vanguard. Compounding grows your money exponentially because you get a return on both your original investment and the returns you previously received on that investment.
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But if you need to tap into your retirement savings, you might want to consider these two options first, Gandhi says:
- A loan from your 401(k). If your plan allows loans, you should pay them back into your retirement account, so you’re paying yourself and not losing money. The money also isn’t taxed if the loan meets the rules and the repayment schedule is followed, the IRS said. Note that loans are capped at 50% of the purchased account balance or $50,000, whichever is less unless half of the balance is less than $10,000. Additionally, “we warn that those funds are taxed and penalized if you can’t repay the loan and expire if you leave your job,” Armstrong said.
- Withdraw money from a Roth IRA. Because you contribute to a Roth IRA with money you’ve already paid taxes on, qualified withdrawals from your contributions are tax-free and penalty-free at any age.
How can I access money without withdrawing from retirement savings?
Before turning to retirement savings for cash, consider some of the following options first:
- savings Unexpected expenses are exactly what emergency savings are for. So if you have any, this should be the first place to go.
- Bank loan. If you have a one-time expense and good enough credit to qualify for a low fixed interest rate, a personal loan can be a good option for accessing some cash quickly.
- Home equity line of credit (HELOC), if you own a home. You use your home as collateral to get a line of credit that you can tap into. You only pay interest on what you withdraw, and the interest can be tax deductible if the money goes toward home improvements. Note that they often have variable rates and interest rates, and the Federal Reserve is currently in an aggressive rate-hiking cycle to lower inflation.
- Additional work “If you can take on a part-time job. many companies are still looking for people at attractive hourly rates,” Gandhi said. Nowadays, there are also a number of side hustles that people can also do from home, such as selling products on eBay or Etsy.
- Credit cards with 0% interest on purchases. “You can use one of these special offers for 12 to 18 months to cross the bridge,” Gandhi said.
- Traditional brokerage accounts. Even if most investments fall this year, there may still be some winners you can pull out. The money will be subject to capital gains tax, but if you have some losses, you may be able to sell those investments and apply them against your gains to reduce your tax bill.
- Flexible and health savings accounts, if your cash needs are to meet health care costs.
- Loan from family and friends.
Medora Lee is a money, markets and personal finance reporter for USA TODAY. You can reach her at [email protected] and sign up for our free daily newsletter for personal finance tips and business news Monday through Friday mornings.
