Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
US Presidential Election Forecast Matrix, Stock Market Uncertainty - 29th Oct 20
Stock Market Turning? Look For These Support Levels - 29th Oct 20
Silver: A Conceivable Dead-Cat-Bounce on the Cards - 29th Oct 20
Stocks are Strong but be Aware of this Continuing Pattern - 29th Oct 20
The Most Profitable Way To Play The Gold Boom - 29th Oct 20
Why You Should Hire An Accountant To Complete Your Tax Return - 29th Oct 20
Global Banking: Some Sectors Look as "Precarious as Ever" - 28th Oct 20
Silver Price Minor Dip Possible Before 2nd Major Upleg Starts - 28th Oct 20
�� How to Carve a Simple and Scary Pumpkin Face for Covid Halloween 2020 �� - 28th Oct 20
Gold Price One Last Dip Likely Then Major Upleg to New Highs - 28th Oct 20
Smart Money Is Going All-In On This New Gold Frontier - 28th Oct 20
Gold Stocks Still Correcting - 27th Oct 20
Gold and Crypto: Is This How Charts Look Before A Monetary Collapse? - 27th Oct 20
Silver's Coming Double Trigger Shotgun Price Explosion - 27th Oct 20
The $126 Billion Gold Opportunity in Australia - 27th Oct 20
Tips to Breeze through Your Spanish Classes Online - 27th Oct 20
Try The “Compounding Capital Gains” Strategy Today - 26th Oct 20
UK Coronavirus Broken Test and Trace System, 5 Days for Covid-19 Results! - 26th Oct 20
How the Coronavirus is Exacerbating Global Inequality, Hunger - 26th Oct 20
The Top Gold Stock for 2021 - 26th Oct 20
Corporate Earnings Season: Here's What Stock Investors Need to Know - 25th Oct 20
�� Halloween 2020 TESCO Supermarkes Shoppers Covid Panic Buying! �� - 25th Oct 20
Three Unstoppable Forces Set to Drive Silver Prices - 25th Oct 20
Car Insurance And Insurance Claims and Options - 25th Oct 20
Best Pressure Washer Review - Karcher K7 Full Control Unboxing - 25th Oct 20
Further Gold Price Pressure as the USDX Is About to Rally - 23rd Oct 20
Nasdaq Retests 11,735 Support - 23rd Oct 20
America’s Political and Financial Institutions Are Broken - 23rd Oct 20
Sayonara U.S.A. - 23rd Oct 20
Economic Contractions Overshadow ASEAN-6 Recovery - 23rd Oct 20
Doji Clusters Show Clear Support Ranges for Stock Market S&P500 Index - 23rd Oct 20
Silver Market - 22nd Oct 20
Goldman Sachs Likes Silver; Trump Wants Even More Stimulus - 22nd Oct 20
Hacking Wall Street to Close the Wealth Gap - 22nd Oct 20
Natural Gas/UNG Stepping GAP Patterns Suggest Pending Upside Breakout - 22nd Oct 20 -
NVIDIA CANCELS RTX 3070 16b RTX 3080 20gb GPU's Due to GDDR6X Memory Supply Issues - 22nd Oct 20
Zafira B Leaking Water Under Car - 22nd Oct 20
The Copper/Gold Ratio Would Change the Macro - 21st Oct 20
Are We Entering Stagflation That Will Boost Gold Price - 21st Oct 20
Crude Oil Price Stalls In Resistance Zone - 21st Oct 20
High-Profile Billionaire Gives Urgent Message to Stock Investors - 21st Oct 20
What's it Like to be a Budgie - Unique in a Cage 4K VR 360 - 21st Oct 20
Auto Trading: A Beginner Guide to Automation in Forex - 21st Oct 20
Gold Price Trend Forecast into 2021, Is Intel Dying?, Can Trump Win 2020? - 20th Oct 20
Gold Asks Where Is The Inflation - 20th Oct 20
Last Chance for this FREE Online Trading Course Worth $129 value - 20th Oct 20
More Short-term Stock Market Weakness Ahead - 20th Oct 20
Dell S3220DGF 32 Inch Curved Gaming Monitor Unboxing and Stand Assembly and Range of Movement - 20th Oct 20
Best Retail POS Software In Australia - 20th Oct 20
From Recession to an Ever-Deeper One - 19th Oct 20
Wales Closes Border With England, Stranded Motorists on Severn Bridge? Covid-19 Police Road Blocks - 19th Oct 20
Commodity Bull Market Cycle Starts with Euro and Dollar Trend Changes - 19th Oct 20
Stock Market Melt-Up Triggered a Short Squeeze In The NASDAQ and a Utilities Breakout - 19th Oct 20
Silver is Like Gold on Steroids - 19th Oct 20
Countdown to Election Mediocrity: Why Gold and Silver Can Protect Your Wealth - 19th Oct 20
“Hypergrowth” Is Spilling Into the Stock Market Like Never Before - 19th Oct 20
Is Oculus Quest 2 Good Upgrade for Samsung Gear VR Users? - 19th Oct 20
Low US Dollar Risky for Gold - 17th Oct 20
US 2020 Election: Are American's ready for Trump 2nd Term Twilight Zone Presidency? - 17th Oct 20
Custom Ryzen 5950x, 5900x, 5800x , RTX 3080, 3070 64gb DDR4 Gaming PC System Build Specs - 17th Oct 20
Gold Jumps above $1,900 Again - 16th Oct 20
US Economic Recovery Is in Need of Some Rescue - 16th Oct 20
Why You Should Focus on Growth Stocks Today - 16th Oct 20
Why Now is BEST Time to Upgrade Your PC System for Years - Ryzen 5000 CPUs, Nvidia RTX 3000 GPU's - 16th Oct 20
Beware of Trump’s October (November?) Election Surprise - 15th Oct 20
Stock Market SPY Retesting Critical Resistance From Fibonacci Price Amplitude Arc - 15th Oct 20
Fed Chairman Begs Congress to Stimulate Beleaguered US Economy - 15th Oct 20
Is Gold Market Going Back Into the 1970s? - 15th Oct 20
Things you Should know before Trade Cryptos - 15th Oct 20
Gold and Silver Price Ready For Another Rally Attempt - 14th Oct 20
Do Low Interest Rates Mean Higher Stocks? Not so Fast… - 14th Oct 20
US Debt Is Going Up but Leaving GDP Behind - 14th Oct 20
Dell S3220DGF 31.5 Inch VA Gaming Monitor Amazon Prime Day Bargain Price! But WIll it Get Delivered? - 14th Oct 20
Karcher K7 Pressure Washer Amazon Prime Day Bargain 51% Discount! - 14th Oct 20
Top Strategies Day Traders Adopt - 14th Oct 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

The Perils of Tapping a 401(k)

Personal_Finance / Pensions & Retirement Aug 24, 2010 - 07:54 AM GMT

By: Nilus_Mattive

Personal_Finance

Best Financial Markets Analysis ArticleFidelity just released a new report and it’s pretty depressing.

The upshot? A record number of Americans are making hardship withdrawals from their 401(k) retirement plans. Worse yet, the number of U.S. workers borrowing from their plans is also at a 10-year high!


I’ll get to why this is so disheartening in a moment. But first …

A Quick Look at the Ways to Remove Money from a 401(k) Plan

The 401(k) plan is the most ubiquitous retirement account in the United States, and for good reason: Any money employees contribute is not counted for income tax purposes. Instead, it’s taxed — along with investment earnings — upon withdrawal.

So how and when can money come out of a 401(k) plan?

The first way is upon retirement, which is defined by the tax code as the contributor reaching age 59 ½. At that point and beyond, any money that comes out of a 401(k) plan is simply taxed as regular income.

The second way is through separation of employment. In this case, the contributor has four choices, which boil down to:

  1. Leaving the money where it is
  2. Rolling it over into a new employer’s plan
  3. Rolling it into an Individual Retirement Account
  4. Withdrawing it.

When done correctly, the first three options don’t result in any taxes or penalties. However, the fourth option DOES (unless the employee also happens to meet the conditions for retirement discussed above).

In short, money that comes out of a 401(k) plan before the contributor reaches age 59 ½ results in both regular income taxes being due but ALSO a 10 percent early withdrawal penalty.

The third way is through what is known as a “hardship withdrawal.” While they’re not required to do so, most 401(k) plans allow contributors to remove money under certain circumstances — including medical expenses, the purchase of a principal residence, tuition and related educational costs, and funeral expenses.

Individual plans have some leeway in how they specifically define “hardship” and what particular events can trigger withdrawals, but the IRS does provide the following guidelines:

“For a distribution from a 401(k) plan to be on account of hardship, it must be made on account of an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need. The need of the employee includes the need of the employee’s spouse or dependent.

“Under the provisions of the Pension Protection Act of 2006, the need of the employee also may include the need of the employee’s non-spouse, non-dependent beneficiary.

“A distribution is not considered necessary to satisfy an immediate and heavy financial need of an employee if the employee has other resources available to meet the need, including assets of the employee’s spouse and minor children. Whether other resources are available is determined based on facts and circumstances.”

In a few specific cases — such as death, permanent disability, or termination of service after age 55 — the IRS will not impose the 10 percent early penalty on these withdrawals. But in most other cases it will.

Worse, employees will also be required to pay ordinary income taxes on the amount removed.

And they will most likely be barred from contributing any new money to any employer retirement plan for at least the following six months!

The fourth way to remove money — temporarily — from a 401(k) is through a loan. Many plans will also allow participants to take out loans from their 401(k) accounts.

Generally, these loans have five-year terms — unless it’s for a primary residence — and carry fixed interest rates. Repayments must be made in regular installments, and everything goes back into the 401(k).

Now, Here’s Why I Find All the Current Borrowing and Withdrawing So Troubling …

Obviously, a lot of Americans have hit rough patches lately … and other sources of credit remain in short demand … which is why hardship withdrawals are at an all-time high.

Borrowing from a retirement account now could leave you struggling down the line ...
Borrowing from a retirement account now could leave you struggling down the line …

But with so many people nearing retirement already grossly underfunded, watching even more money flow out of their accounts is going to prove catastrophic down the line.

And since most of those withdrawals are getting hit with not just regular taxes but also the additional 10 percent penalty, we’re talking about a lot of nest egg money getting vaporized before it even goes toward their immediate needs!

Oh, and get this — Fidelity said 45 percent of the people who took a hardship loan last year took ANOTHER ONE this year!

What about all the 401(k) borrowing going on?

Well, on the surface it’s better to take a loan than an outright withdrawal because taxes and penalties aren’t assessed.

Still, there are a couple of things I find problematic:

#1. Unlike hardship withdrawals, there are no hard-and-fast rules on loans. So there’s no guarantee that this money is truly being borrowed for dire circumstances. People could simply be tapping their future retirements in the same way that they tapped their home equity a few years ago.

#2. While it’s true that this money should ultimately be repaid, and at least the interest will go back to into the retirement account, it essentially means that very little new money will be contributed. The end result will be a lower final balance and the loss of the very tax advantages that make 401(k)s attractive in the first place.  

Look, if you’re absolutely stuck right now, then you’ve got to do what’s necessary. But in my opinion, you should avoid 401(k) hardship withdrawals at all costs … and think long and hard before you consider borrowing against your future retirement.

After all, the other typical sources of retirement income are looking shakier than they ever have before … and the folks tapping their 401(k)s may find themselves completely out of options in their golden years.

Best wishes,

Nilus

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Rick
24 Aug 10, 11:14
Retirement Plans

The 401K's, the Roth IRA's and traditional IRA's will degrade into just another glorified Ponzi scheme like Social Security. Cash those plans out now while you still may have that option.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules