Some administrators of the largest 401K funds say they are seeing double digit increases in the number of people applying for "hardship" withdrawals from their retirement plans. Folks are using retirement savings to pay for unmanageable mortgages, maxed-out credit cards and costly utilities and groceries.
The Associated Press reports:
Dipping into 401(k) accounts can carry risks because defaulted loans and hardship withdrawals are taxed as income and are subject to a 10 percent penalty if the worker is under 59 1/2 years old. That means if the trend grows, many Americans will risk coming up short on retirement savings or may have to rely on an overburdened Social Security system.
"People who take out a loan or withdrawal are adding to a looming retirement crisis over the next 30 to 40 years," said Eric Levy, a partner at global consulting firm Mercer. "And what implications will that have (for) our economy?"
Money-Zine.com explains more about hardship withdrawals and when, if ever, they are a good idea:
The IRS has a provision for employers to provide for a safe harbor withdrawal from a 401k plan if there exits an immediate and heavy financial need or burden. The only money exempt under the safe harbor rule is that which is used to satisfy that immediate and heavy financial need. According to the IRS the safe harbor hardship withdrawals from a 401k plan are limited to:
- Money used to pay certain medical expenses for you, your spouse, or any of your dependents.
- Payments of specific post-secondary education expense for the next year for you, your spouse, or any of your dependents.
- The purchase of a primary residence.
- Money needed to prevent eviction or foreclosure on your primary residence.
Hardship withdrawals made under the safe harbor provision may exclude you from making contributions to your 401k plan for six months or more. Federal income tax on the hardship withdrawal may be deferred until age 59 1/2, but a 10% penalty may still apply.
