401k loans and withdrawals on the rise

The number of people taking hardship withdrawals and loans from their 401k plans has reached record levels.

Relevant Articles:

Recent reports indicate that about 2.2 percent of people enrolled in 401k plans have made a hardship withdrawal from mid-2009 to mid-2010. This is the highest rate in 10 years. Nearly half of participants who took a hardship withdrawal have done so for two years in a row.

People are also taking out 401k loans at record levels. Over 20% of 401k participants currently have outstanding loans from their account. Average loan amount is between $8,000 and $9,000.

This high rate of 401k withdrawals and loans indicates a dire need for families to access cash. 401k hardship withdrawals are only available to people experiencing immediate and heavy financial need. Parents will need to demonstrate that need before being granted a hardship withdrawal. Fortunately for parents, paying for college qualifies for hardship withdrawals and is one the top reasons people are tapping into their retirement savings.

Economic difficulties can force parents to use their 401k accounts to pay for college expenses because it is their only form of savings. However, parents should be aware of the penalties and taxes associated with 401k withdrawals.

While most people making 401k withdrawals are between 35 and 55 the withdrawal is subject to a 10% penalty if made before 59 ½ years of age. This penalty can balloon to 40% after state and federal taxes are added.  Parents withdrawing funds form their 401k should be sure to keep some of the withdrawn funds aside to pay the tax due.

401k loans, unlike a withdrawal, must be paid back with interest. And unlike withdrawals, there is no penalty associated with borrowing funds from your 401k. Interest rates for 401k loans are around 4.5% and paid back in five years.

Cheap Textbooks!
Loans for College
Scholarship search
More Articles Like This: 401k loan vs. 401k withdrawal Top 5 reasons not borrow from your 401k account