Fidelity Investments says more people are tapping their 401(k) retirement plans early, with “hardship withdrawals” at a record high and borrowing from 401(k) plans at a 10-year high.
Maybe that is not such a surprise in a recession, when people need to pay bills. But it may surprise you to know that quite a few of the “hardship withdrawals” are being made by people who want to buy a house. Low real estate prices make an early 401(k) withdrawal look better than it might, even with the stiff tax hit that comes with it.
Fidelity’s report also makes the point that most 401(k) contributors do not draw out of their plans early and, in fact, even in hard times have continued to pour money into their accounts:
” ‘We recognize that for some, taking a loan or a hardship withdrawal from their 401(k) may be their only option because it’s their only form of savings,’ said [James M. MacDonald, president, Workplace Investing, Fidelity Investments]. ‘However, we want to make sure that before workers tap their retirement accounts prematurely, they are fully educated about both the penalty that may be incurred and the long-term implications for their retirement.’
“During the second quarter of this year, 62,000 participants initiated a hardship withdrawal, as compared to 45,000 participants who initiated one during the prior quarter. As of the second quarter, 2.2% of Fidelity’s active participants took a hardship withdrawal, up from 2.0% one year prior. Additionally, 45% of participants who took hardship withdrawals one year prior also took a hardship withdrawal in the 12 month period ending in the second quarter of this year. Plan sponsors report that the top reasons why participants are taking hardship withdrawals are to prevent foreclosure or eviction, pay for college, and the purchase of a primary residence.”
