MINNEAPOLIS — It's a sign of the times: High inflation and the rising cost of living are leading more Americans to dip into their retirement accounts to make ends meet.
Every quarter, Fidelity Investments releases a retirement report where analysts look for trends among their 45 million active retirement accounts.
The company’s third-quarter report revealed more Americans are using their retirement accounts to pay the bills.
The data taken from its report showed 2.3% of retirement account holders took out a new hardship withdrawal, 2.8% filed a new loan against their 401(k) account, and 3.2% took an early withdrawal from their account.
Those numbers are just new withdrawals and loans, meaning they don’t include loans that are still ongoing. Regarding ongoing loans, Fidelity said 17.6% of the retirement accounts it manages have an open loan that is still being paid off.
“It’s obviously a big concern,” financial advisor Grant Meyer said.
Meyer owns GTS Financial in the Twin Cities.
He said 401(k) loans can be a lifeline for families who are struggling, but other options should be considered first.
Before dipping into your retirement accounts, Meyer said account holders should first look toward their savings accounts. If they don't have any savings left, Meyer said to consider making a withdrawal from a Roth IRA account.
Meyer said the money that is put into a Roth IRA account can be withdrawn tax-free and without penalties because the taxes on that money have already been paid.
Meyer said if you don't have a Roth IRA, your next resort can include dipping into your 401(k). He explained that withdrawing from your account can be done in three different ways. For one, if your 401(k) plan allows loans, you can borrow the money and pay yourself back over time.
Meyer said that's typically the best option.
"You can potentially take a loan out to cover a shortfall," he said. "The neat thing with a loan is you do pay yourself back."
Meghan Hannon with Boulay Financial Advisors said the second-best option is to make a hardship withdrawal from your 401(k).
“Some 401(k) plans don’t allow loans, but a lot of plans do allow a hardship withdrawal, which is an option people should consider,” Hannon said.
For a hardship withdrawal, Hannon said the account holder would need to consult with their 401(k) plan advisor and would also need to provide paperwork that shows the money is being used for an emergency.
“There are eight or nine categories that the IRS has listed as possible emergency situations that would allow for a hardship withdrawal,” Hannon explained.
Some of those situations include medical expenses, a death in the family or a possible eviction/foreclosure.
Hannon said with a hardship withdrawal, the account holder still has to pay taxes, but in most cases, they can avoid the 10% early withdrawal penalty.
This brings us to the third option: taking an early withdrawal from a retirement account.
Hannon and Meyer both agreed this third option should be an account holder's last resort, saying an early withdrawal comes with taxes and penalties if the money is taken out before the account holder turns 59 ½ years old.
Hannon says all three options come with risks because they all take money out of a retirement account that is meant to help the account holder prepare for their actual retirement.
"When you borrow money from your 401(k), your money isn't in the market. You're potentially missing out on investment returns with your retirement savings. So, that's something you want to be aware of,” Hannon said.
Meyer said another option for families who are struggling is to consider a HELOC, or Home Equity Line of Credit.
“Tapping the equity in your home can bring interest payments of 8% or 9% or more, but it’s a much lower rate than what credit cards are charging, so it’s a better option than racking up a lot of new credit card debt,” Meyer said.
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