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 Moreover, the funds that were withdrawn will no longer grow tax deferred.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hardship withdrawals are generally subject to federal (and possibly state) income tax in the year the money is withdrawn.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?
I am seeing more posts getting away from excerpting.
I think excerpts encourage people to click on the link, which is only just to reward the author who wrote the piece and the site that published it.
As for your post, excellent as usual. Had not seen this particular author at American Thinker, but she’s a find!
Wait till the emperor steps in and imposes a moratorium on them or something.
Scouts Out! Cavalry Ho!
For almost two decades we as a nation have saved between 1% and -1%. Is it surprising that, when difficulties arose, that there is no other recourse?
It’s not about not caring about the future, it’s about feeling more sure there won’t be one.
Huh? You mean withdrawing money to pay the mortgage is "I don't care about the future"?
Excerpting for a lot of news sites is required. It's the blogs that post one sentence and then expect you to go there to read the rest. I don't. If a blogger doesn't have enough respect for what he's written to post the whole thing then I don't bother giving them hits.
What are they going to do now?
There used to be stories about how the govt. was going to take over all 401K's and manage them. I haven't seen one in a while and that scares me.
Am sure he is glad he said he wasn’t “going to rest until...” instead of saying “I’m not going to eat ice cream until...” or “I’m not going to play golf until...”
On this topic it seems a little known fact is if you leave your job (quit OR fired) at age 55 or older, you may make withdrawals from your 401k at that firm WITH NO 10% PENALTY!
I state this not to advocate withdrawals but to make people aware they may be paying a penalty FOR NO REASON!!!
I even had this argument with this CPA broad in a bar. She kept saying no.. no.. no ..
So please refer to IRS Publication 575, and Form 5329 Instructions (line 2), to confirm this.
It does not apply to IRA’s and if your former employer’s plan made you roll it into one, you are screwed ... sorry.
Thanks for reading ...
Can you explain for me the difference between a 401k and an IRA?
...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.
I’m no accountant (as the CPA reminded me .. hahaha) but basically IRAs are retirement plans you open as an individual with a brokerage or other entity while 401ks (and 403b) are managed through your employer, and may be eligible for matching funds from the employer and other benefits.
There are other differences such as max allowed $$ contributions per year for each plan, whether loans are allowed, etc. At this point an expert should chime in.
It is my understanding that if YOU have an IRA, YOU own it. It’s individual. 401(k)s are through corporations.
IIRC, it’s the 401(k)s 0bama, the Democrats & feds have discussed ‘bailing out’ or ‘appropriating’ or some such nonsense. That represents a whale of a lot of $$. And Soros has gone in nearly all gold & commodities.
They want the money, or, to have us spend every last cent we have.
It’s interesting that 0baSoroXerxes think they will be able to hold the reins with their Bilderberg buddies.
They won’t.
At least the government isn’t doing it...(yet...)
Also it’s better than taking gov’t money...
Second thoughts abound presently I bet.
I hate when people presume that those who are jobless can just sit on the toilet and sh*t out money.
Reading FR you’d think we could.
Thankfully my family is doing OK financially, but I know many in your position.
Best of luck to you.
1) If you take out a loan and are employed, the money comes back out of your payroll and goes back into the plan - as does the interest on the loan - since you are essentially borrowing money from yourself. Yes, it hurts your nest egg temporarily and over the long run, but it isn't fatal as long as you stay employed and the debt gets paid.
2) If you take it out as a payment, you get hit with high taxes twice - first at the time of withdrawal and secondly as income. When I did it, there was no preconditions for hardship and I did not have to get permission from my employer. I'm also below age 59.
3) When a co-worker was asked what happens if he loses his job and has a loan outstanding, he was told he would be sent a passbook and would be expected to make monthly payments as before. ABC News said you have to pay back every penny to the 401k immediately, which would be a hardship to most people who took out the money in the first place.
4) The interest rates on the loans were much better than what I could have had with a personal bank loan, which is why I took them out. You could not withdraw more than 50% of your balance and could not take out more than two loans at a time.
But the Democrats were expecting to keep Medicare and Social Security solvent by RAIDING our 401k's.
Fixed.
bkmk
Is it possible to roll the current 401k into an IRA so I'll have more control over it? Also, my employer recently offered Roth IRA plans, but I don't really understand that option either.
As an aside, I really don't like the Vanguard IRA... they really limit you on what funds you can buy into, and they offer no PMs or gold ETFs unless you've got beaucoup $$ to put in to start off.
Good observation. It's foolish to think the government is not going to mess with 401k's considering what they have done so far.It's only a matter of time now,so you might as well use the money to take care of family needs
I don’t think that’s a bad idea at all,,,
A friend of mine is doing the same thing,,,
The gubmint can always swoop down and steal it,,,
Just leave you an IOU...
IRA is for individuals. 401k is company-sponsored. Do I win a prize? LOL
How’s....that....Hopey-Changey...Thing...Working...Out...for...Ya?
Amen and ditto. Too many blog pimpers around here.
“So please refer to IRS Publication 575, and Form 5329 Instructions (line 2), to confirm this.”
Appreciate your concern, but we’re heading to a situation where Publication 575 won’t matter. Pretty soon it’s who pulls their weapon the fastest and who shoots the straightest.
So, all that money you have saved for 20+, 30+ years will be GONE!
You are better off putting your extra money in a Passbook Savings account.
I had a 401K a long time ago in a previous employer, I no longer contribute to one for the past 5 years ... they are worthless.
Every dollar pulled from a 401k shrinks the money supply by about 95¢.
We call that deflation.
These are basic answers to your questions...
Far as I know that prior rollover would be into an IRA and subject to penalty if removed before 59 1/2. I would imagine your statements from Vanguard would say Individual Retirement Account (IRA).
Your current plan, since employer has some match, would indeed be a 401k. There are some employer 401k plans that allow prior 401k to roll into their plan, but that varies and you need to ask them.
If your question is can your current employer 401k go into an IRA now, I believe the answer is no.
Roth IRA is post tax money and has easier withdrawal rules (while 401k money is tax deferred .. ie. you do not pay tax now on the $$$, but when you withdraw it).
If you have a Vanguard IRA now, you should talk to them or to your current employers benefits specialist.
I am not a financial advisor of any kind.
I do know a friend of ours cannot roll a current 401(k) anywhere while still employed by that corporation. Ditto for someone I know in TIAA-CREF.
I also know someone who took an IRA and moved it recently into CDs only. At that time, the financial advisor said that he has clients who are now in gold 100%.
Talk to a financial advisor about your options. Best I can say.
I have also listened in on a few hushed conversations of people who have sold rather expensive properties and have gone all cash, floating around and looking for a place to light or be ready to move quickly. Each of these conversations went mum when they realized I might be listening. They were interesting smidgens of conversations, considering these were in places known for their exclusivity.
Batten down the hatches. Everyone knows we’re riding low in heavy seas. Everyone. No matter their income.
If I had taken all my money out in 2007 and paid the tax and penalty on it, I would still have more than I have today.
The Government doesn’t mind at all that a person withdraws money from their accounts. They charge extra taxes so the gov. is making more money off of the hardship of the working people. Isn’t government great!
I borrowed as much as I could from my 401k for my farm in Kentucky. It wasn’t hardship. It was getting a galt’s plateau with the cheapest money possible.
Exactly!
Thanks guys
It is people who are desparate and out of money.
Maybe they will get smart and cancel cable/sat TV because ALL of TV supports Obama and keeps him in power. The American public is so manipulated by TV but they are too stupid to care.
The thing that happens during a liquidity trap is that people do unusual or desperate things to find the credit that they need.
Credit is scarce during a liquidity trap.
But selling things to obtain cash or credit creates more sellers than buyers, so prices fall.
Deflation.
Amen and ditto. Too many blog pimpers around here.
One of them is using a variant on my screen name. He's OldPossum1 and if you examine his history it's nothing but a series of posts with him as the poster and he makes no other posts on FR.
He just uses FR to direct hits to his blog.
That may or may not be true ... but my original intent was to alert those who blindly already paid the 10% penalty they may be able to recoup that dough ...
This rule was in effect since last year .. I do not know about 2008.
The reason Americans have not saved is because we are taxed to death and hit with inflation. Some are taking money out of their 401k accounts now, because they think the government is going to confiscate the money. I would not be surprised.
Just finished mine off. Ate the penalty - paid the taxes. (Who really knows what the tax rate will be 10 to 20 years from now anyway?) Social Security rules seem to change annually and more banks are going under ever day. So I'm taking the loot now - while it's still there.
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