As the economy continues to ail, greater number of workers are tapping their retirement accounts and taking out cash to tide over present needs. This is usually taken to be the last resort but that is happening right now as Americans are battling unemployment, foreclosures and unpaid bills.
During the quarter starting from April this year, over 62,000 workers made hardship withdrawals from their retirement funds. During the same quarter in 2009 the number had been 45,000 as per the findings of Fidelity Investments. It is a record.
Of greater concern is double dipping. 45% of the workers, who had resorted to hardship withdrawals one year previously, are doing so again in the current year. Michael Doshier of Fidelity said, “That tells me you have people who have been impacted by the economy in a big way, whether that’s underemployment or a complete job loss. I look at this as people are desperate; people have no other way to pay a bill”.
One of them is Ricky Cross who is up against foreclosure on his house in Brown County. His wife lost her job forcing him to dip into his 401(K) (20 years old). Ross in his early fifties admitted that it hurt him. He said, “It’s like I’m starting all over, but at least I still got a little bit in the nest egg. Things could get worse”. Cross could not accept the idea of losing the house that was his home where he had grown up and thus withdrawing funds seemed to be the only option.
The decision is neither an easy nor light one. Fidelity accounting for 20% of America’s 401(K) plans did not provide details of state wise withdrawals. But financial planners think that more are thinking along similar lines of withdrawing pension funds – something they are discouraging. Jason Johnson is a financial adviser. He said, “A lot of the time if we are talking about a hardship withdrawal, we are backed into a corner. We need to make sure we are making the right decision based on fact and not emotion”.
The consequences of early withdrawals are grave. There are taxes as well as penalties to bear. Sometimes the IRS might take away a third or even more of your funds. Premature withdrawal also places a ban for six months on making further contributions to the plan. Some financial advisers think a better option is to take a loan from this account instead of withdrawing.
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