More Americans Dipping into 401(k)s to Pay Down Debt

More Americans Dipping into 401(k)s to Pay Down DebtA new study shows that more than a quarter of Americans, an increasing percentage, are resorting to pulling  money from their retirement accounts, or 401(k)s, to pay down debt such as credit card or mortgage balances.
And it is costing many of them extra, since there is a 10 percent penalty for early withdrawals from these funds for people younger than 59 1/2.
More than one in four workers either withdraw money or take loans from their 401(k) and other retirement accounts, according to the Washington Post, citing the forthcoming data from the financial advisory firm HelloWallet.
That’s about a quarter of the $293 billion that’s deposited into these accounts each year.
“Taking loans from a 401(k) plan isn’t necessarily a better option,” writes Carole Fleck, senior editor for the AARP Bulletin and website. “We’re taking out money so we’re missing out on growing our funds in a tax-free environment. Though we aim to pay it back, with interest, what happens if we run into financial trouble unexpectedly and we can’t?”
That happened to more than 17 percent of workers last year, Fleck said. They defaulted on their 401(k) loans at double the rate than those who took out loans before the financial crisis hit.
Financial experts say you should only take money out of a retirement account in an emergency, and only as a last resort.
Big-ticket purchases such as a car, a kitchen renovation or a trip, should be financed through standard lending routes, but at the lowest interest rates possible and if your “income-versus-expenses” ratio allows for such purchases.

Leave a Reply

Your email address will not be published. Required fields are marked *