Posted on 08/21/2010 5:22:10 PM PDT by 2ndDivisionVet
As the economy continues to worsen under Obama's "recovery" plan, more disturbing news emerges. A record number of workers made hardship withdrawals from their 401(k) retirement plans. In fact, "the number of workers borrowing from their accounts reached a 10-year high" and reflects "the financial stress many workers" are experiencing according to Beth McHugh, Fidelity's vice president of marketing insight.
The report was made by Fidelity Investments which administers 17,000 plans and represents 11 million participants. The number of people initiating the hardship distributions has risen from 45,000 in 2009 to 62,000 in 2010. Equally alarming is that "45 percent of participants who took a hardship withdrawal a year ago, took another one this year."
These 401(k) withdrawals are a result of the increasing unemployment in the country as well as companies cutting back on "overtime or overall hours" of their workers.
401(k) plans have "a provision that allows withdrawal of money from the plan" if an individual "can demonstrate ‘heavy and immediate financial need' and there is no other resource that an individual can use to meet the need." Many employers allow hardship withdrawals only for the following reasons:
•To pay the medical expenses of the worker, his/her spouse, or dependents •To pay costs related to the purchase of a principal residence •To pay a maximum of 12 months worth of tuition and related educational expenses for post-secondary education for an individual, his/her spouse, or dependents •To make payments to prevent eviction from or foreclosure on the principal residence
An employer will generally require that the employee submit a written request for a hardship withdrawal.
The disadvantages of withdrawing money from the 401(k) before it was intended include an overall reduction in the size of a person's retirement nest egg. Moreover, the funds that were withdrawn will no longer grow tax deferred. Additionally, hardship withdrawals are generally subject to federal (and possibly state) income tax in the year the money is withdrawn. A ten percent federal penalty tax may also apply if an individual is under 59 ½ years old. In addition, an individual may not be able to contribute to the 401(k) plan for six months following a hardship distribution.
The economic downturn has rippling effects in other ways as well. A survey conducted by the International Foundation of Employee Benefit Plans in May 2009 found that "the [economic] crisis has forced both defined benefit (DB) plan sponsors and defined contribution (DC) plan sponsors to make changes to their retirement coverage and plan design." The reexamination of offering pension benefits has resulted in "27 percent of DB plan sponsors [discontinuing] offering pension benefits for all or some employees and 21 percent have closed their plan to new participants."
Furthermore, there is also an impact on the employer match as DC plan sponsors "reduced or eliminated employer matches as a result of the economic situation." Sally Natchek, Senior Director of Research at the International Foundation of Employee Benefit Plans has said that "although the number of plan sponsors who have reduced or eliminated their employer match is relatively small, the number is still significant since any change tends to result in the employee lowering his or her contribution."
Thus, as companies make less profit, they decrease their overall retirement plan contributions; this, in turn, makes it less advantageous for employees to contribute to their own retirement plans. In some cases, the number of participants completely stopping plan contributions altogether has increased.
Moreover, in a study entitled 401(k) Plans in Living Color: A Study of 401(k) Savings Disparities Across Racial and Ethnic Groups ~ The Ariel/Hewitt Study found that:
African-Americans are also more likely than the study population overall to have a loan and are more than twice as likely to take a hardship withdrawal from their 401(k) plans. Nearly two of every five African-American workers and almost a third of Hispanic workers borrowed from their retirement accounts compared to just one in five white workers. By contrast, Asian workers were the least likely to take a loan against their 401(k) plans, with less than one in five doing so. ‘These statistics are troubling because loans and withdrawals jeopardize long-term financial security to satisfy immediate needs. The impact is heightened during an economic downturn, when unemployment rises and withdrawals and loan defaults increase. We now realize this risk is magnified for African-American and Hispanic workers based on the results of our study,' said Barbara Hogg, principal at Hewitt Associates and co-leader of The Ariel/Hewitt Study.
All these factors result in a "substantial impact on employee efforts to save for retirement."
As Americans become more mired in financial hardship and worry, there is a domino effect which leads to even more stress and anxiety. The short term and long term financial effects are quite serious as people worry about layoffs coupled with a diminished ability to plan for retirement.
The irony is that saving into 401(k) was supposed to be the solution for a successful retirement for Americans and this dream is evaporating for too many.
When will Congress and the president put the brakes on an economic philosophy that is bringing misery to so many American workers?
Go here: http://72t.net/Home
And here: http://www.investopedia.com/terms/s/sepp.asp
On the SEPP click down below on the rules....
If you leave a job sooner, the 410k can be rolled into an IRA regardless of your age, but you can withdraw from an IRA, @ 59 & 1/2.
Little known rule some employers have...
It is called "Inservice Withdrawal (Class)".
When your employer established their 410k they allowed this in the rules, then it can be done. What is does is allow you take up to a percentage of your contributions and Roll them over to an IRA, one employer I know of allows up to 80%.
This in "normal" times allowed many to go outside of family of funds within their 401k and go to larger platforms for greater diversification.
Go here: http://www.advisorworld.com/2009/04/17/a-little-known-irs-secret-the-in-service-401k-withdrawal
I think you mean 401k, not 410k. ;)
Being as concerened as they are about the economy and all.
Crickets...
I don’t know for certain but refer to IRS Pub 560, which does seem to have this same exception for SEP accounts, though you should check with an accountant or directly with the IRS.
Just don’t let your accountant blow off these exceptions ... make them look into it!
After many years of trying, I had high risk pregnancies back to back. Used ALL my time through my emplower (plus nearly 3 weeks of unused vacation time that had rolled over) keeping my son inside. When my daughter came along, there was no time left.
We had plenty of money saved and next to nothing on credit cards. I went part-time to increase her chances of survival, since we had enough saved to make up the difference until I could get back on my feet. Then a series of disasters hit. My husband was injured at work and needed surgery, then my son needed surgery, and then my daughter was two months premature. By the time she was born, our bank account was nearly cleared out. We had 4 nest eggs when another $67K in bills landed in our lap.
Breaking those nest eggs was definitely a hardship withdrawal. We took those hits because we had no choice. We've been laboring under years of debt because additional medical bills just kept coming. I'm not complaining, I'm just pointing out that it's very possible that gainfully employed, frugal folks can still be struggling through no fault of their own.
Over two years ago, a friend of mine lost his job of 27 years as a top level IT exec at a bank. He sent out nearly 700 resumes, all across the country, looking for work. They, too, were frugal folks who saved, saved, saved. His wife went back to work full time, but after months of struggling to maintain their house, cars, kids in private school, life had to change. They cut every corner, hopeful that a new job for John was just around the corner. When he finally got a job, it was making $12 an hour, not the $120K they were used to, but it came with benefits.
The company decided to nix the project his group was working on because the market is so soft. He's back to unemployment again. And there went a nest egg while they hang on.
My husband and I have, collectively, about $180K in retirement savings. We no longer have anything set aside for college for our kids, definitely not enough to retire on, and less than $2K in our bank account. We pay out debts, take care of our babies, and don't ask anyone (especially the government) for anything. And we will be working until the day we die.
The first wave of foreclosures in 2008 were the folks who had little or nothing saved for a rainy day. The second wave - and it is coming - will be people who used up all their rainy day savings and their storms dragged them under.
That is fine but I just hope that you are over 591/2 so that you don’t have to pay that 10 percent penalty.
See my post just above yours. My husband and I are now in the category of "never being able to retire."
I will be working until the day I die. Heck, my great grandfather worked until his death at 96, tending the fields of his farm in Germany.
And with the creatures in the White House doing their best to tear everything down, we may radically change our lifestyle even more. November 2010 will be the telling point for many, I believe.
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You scream, I scream, we all scream at the sight of the Arrogant One and the Queen of Spain on vacation, EATING ICE CREAM !!
>>> Cavuto was interviewing a guy about this same issue this week and Cavuto doesn’t agree totally with your premise. I believe he said something to the effect that perhaps they don’t trust the future or that the money will be available later when they really do need it. He also raised the issue of the amount of tax these people are going to have to pay if they are under 59 1/2 which is substantial and makes little sense unless you are really in a bind financially. I wonder if they are concerned about the future why they don’t just stop further contributions if such is possible. <<<
The problem, Grams A, is that if someone is really in a financial bind, taking money out of a 401(k) is one of the WORST things you can do because if you lose your house, go into bankruptcy, and find that you have nothing, a lot of judges are very, VERY hesitant to smash the retirement account protection wall. In most cases, with few exceptions (such as student loan debt and the new income rules), you will get your debt discharged and get to keep almost everything tucked away in 401(k)’s, IRAs, SEPs, etc.
That means that if things are going downhill, the smartest strategy is to continue making the maximum contribution possible. If and when someone does pull the nuclear switch, it ensures they could have potentially hundreds of thousands of dollars left in retirement assets but still have their debts discharged.
Instead, people hang on too long, thinking they will get work soon. They let their fixed costs eat up their savings, then they dip into retirement, and then they lose everything. When it’s time to start over they are 10 years behind where they would have been had they just pulled the trigger faster and protected their retirement money.
(As for the ethics of it, you will have to answer that yourself. I’ll just say that lenders are fully aware of the rules and the low probability of getting retirement money so this is priced into default rates indirectly.)
I'm curious to know whether loans to yourself from your 401K ever show up on a person's credit report, and if they do how they affect their credit score. Also do you take these type of loans into account while figuring out the debt to income ratio of prospective borrowers?
Understood. A lot depends on where you are financially, your age and your net worth. I've just seen a lot of suggestions of doomsday scenarios since I've been around here and most never materialized.
When my employment was certain and the company was doing well, putting money into the 401(k) and watching them match it dollar-for-dollar was just the fastest way to grow a secure retirement. But there have been some big bumps in the road since then and, like you, I have fears it will all blow up and leave us with nothing.
I'm going to hold my water until after the election. By then, I'll know if I'm keeping my job and if the Dems are going to still be in a position to destroy America. If my worst fears are realized, I'll be right behind you liquidating my 401(k) before it's too late.
Therefore, I'm not sure it is a good indicator of one's credit worthiness since paying it late or not paying at all has been pretty much removed from your hands.
Zero has created lost of disturbing trends. This may be mean, but I hope independents and others who voted for him are hurting.
McCain may be a Rino but would he have pulled this monstrous failed stimulus-bailout-healthcare crap? No!
I'm just curious to know how these type of loans are looked at by mortgage lenders going forward.
I don’t believe they do, but double-check with your HR department or fund administrator.
Consider buying a large safe.
Thanks. I bet we see more and more of these support pieces for this crap.
Good idea; I’m going to take out my 401K and hubby is going to cash in his IRA. We’d rather take the tax hit now than have Obama take the whole thing and give it to the NY deadbeats.
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