January 19, 2017
People Lack Emergency Funds, Tap 401ks
When between 45 percent and 60 percent of Americans don’t have enough money for retirement, encouraging saving is a national priority.
A related issue is preserving the funds once they’re set aside.
A survey released last month by Transamerica indicates that workers frequently resort to hardship withdrawals and loans from their 401(k)s, because they lack the cash required in emergencies. The survey bolsters the argument made by some retirement experts and employers that until workers’ cash-flow problems are addressed, many will continue to view retirement funds as their best option in an emergency.
More than one in four U.S. workers in the survey said they have taken premature withdrawals from their 401(k) or IRA retirement funds. Catherine Collinson, president of the Transamerica Center for Retirement Studies, connected this “alarmingly high share” to a shortage of cash: 21 percent of workers reported having less than $1,000 saved for emergencies and another 14 percent have saved just $1,000 to $5,000.
So it shouldn’t be surprising that the top two reasons for hardship withdrawals were for medical expenses (24 percent of those surveyed) and to prevent home evictions (20 percent). Hardship withdrawals are subject to a 10-percent penalty tax on the amount withdrawn.
Loans from 401(k)s, which are permitted under federal law and typically are repaid, are also being used in emergencies: nearly three out of four people put their loan proceeds toward “unplanned major expenses” or to pay off credit card and other debts.
If workers “don’t have cash on hand, the credit card is the natural go-to source of funds,” Collinson said. When the debt pile gets too high or other emergencies arise, 401(k)s are one way Americans are solving the problem.
But this solution to short-term crises can create big problems in the long-run.
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