...these are not “hardship withdrawals” but I-don’t-care-about-the-future withdrawals.”
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.
>>> 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.)