Employees Raiding 401Ks to Pay Bills

[Helena]

Just think of all the taxes and penalties
paid to the government when cash poor
employees raid their 401K retirement funds
to pay credit card and mortgage debt.

I wonder how many of those 401K loans
are ever paid back ?




Employees Raiding 401(k)s, CFOs Say

The economic slump will cut into employee bonuses, new survey results show, even as many workers are already taking hardship withdrawals from their retirement funds.

December 5, 2007

The weakening American economy is beginning to take its toll on corporate employees where it hurts the most: their salaries and savings.

The latest Duke University/CFO Magazine Global Business Outlook Survey, which polls 573 finance chiefs in the U.S. and 1,275 globally, finds that year-end employee bonuses will fall by 10 percent this year compared to 2006. That decline could be especially painful at a time when more employees are dipping into their retirement accounts in order to pay bills.

The survey finds that nearly 20 percent of companies have seen increased hardship withdrawals from 401(k) accounts, often to cover mortgage payments or to avoid personal bankruptcy.


"In the last four or five months we have seen an absolute onslaught of people trying to do hardship withdrawals and loans out of 401(k)s," Mark Anderson, CFO of Granite City Electric, told CFO magazine in October. "What has happened with housing and the economy has really blown up for people at the lower end of the spectrum."



entire article at link

Employees Raiding 401(k)s, CFOs Say - - CFO.com

 

[W2R]

Some of my co-workers did that after Katrina. I can think of a lot of things I would rather do in a pinch, than take out a loan on my TSP (=401K). I guess they had no other choices left. The whole idea gives me the willies! Ugh.

That's like borrowing time from your future.

 

[Fireup2020]

Guilty. I raided my TSP before I understood the true consequences. All paid back now...today I consider myself wiser for having learned from my mistakes. Fortunately, in the big scheme of things, it was just money. Part of a long bumpy road to financial freedom!

 

[Bestwifeever]

Raising my hand. Used it for DD's wedding. Will be paid back before retirement. Don't feel at all guilty or stupid about it--virtually all our savings are in our 401K; retirement income will be 100 % of preretirement income. Personal decision that made financial sense for us. Flame away.

 

[Helena]

Raising my hand. Used it for DD's wedding. Will be paid back before retirement. Don't feel at all guilty or stupid about it--virtually all our savings are in our 401K; retirement income will be 100 % of preretirement income. Personal decision that made financial sense for us. Flame away.

What happens to that 401K loan if you lose your job ?

 

[Bestwifeever]

The same thing that happens to any loan if we lose our jobs--we pay it back or it gets subtracted from our 401k balance. Either way not a problem for us.

 

[jIMOh]

I've taken 401k loans twice. Two points- both were for downpayments on a house. And when I took the second loan I learned from the first and paid it back in 14 months (shortest repayment period allowed).

The first loan was taken around Feb of 2000, right before the tech crash. I actually saved/preserved money taking the loan.

 

[Moemg]

Raising my hand. Used it for DD's wedding. Will be paid back before retirement. Don't feel at all guilty or stupid about it--virtually all our savings are in our 401K; retirement income will be 100 % of preretirement income. Personal decision that made financial sense for us. Flame away.

Don't feel bad I worked an extra year for my daughter's wedding .

 

[FinanceDude]

Don't feel bad I worked an extra year for my daughter's wedding .

I have a dumb question....why is it that the bride's family has to pay the whole thing? Other than tradition, it doesn't seem that smart financially.........

DW and I paid for our own wedding, but then again my FIL was on Medicaid and her mom had passed away a long time ago, so it was up to us, or it wouldn't have happened.

I often reflect back to those times........in 18 months we accomplished the following:

1)paid off her student loans and mine in the amount of $8,000.

2)Paid for a wedding and honeymoon equalling $13,000.

3)Saved $15,000 to go toward a house in the future

So, we managed to save $36,000 in 18 months, and still kept the 401K and stuff going........

And I think our joint income at the time was roughly $70,000......so not bad.........

Kids slowed that savings rate down a little........

 

[Donzo]

In 1984 I took $17,000 out of my 401K to buy my first home. There was no penalty. I paid back the loan in 5 years - sold the house 9 years after the loan and realized a $74,000 net gain......that one worked out! Never would touch under any other situation.
But, If ...you were gonna lose your house w/o raiding your future(401K) what would you do? Today's pretty important also - that would be a sad place to be....

 

[jazz4cash]

What happens to that 401K loan if you lose your job ?

It is considered a withdrawal and may be subject to 10% penalty if not paid back before termination. I consider 401k 'loans' to be a tool of last resort...no big deal, but not to be done willy-nilly either. I think people are mis-lead by calling them 'loans'. They are liquidations, not loans!

 

[bamsphd]

I used a 401k loan the last time I moved. It was effectively a bridge loan while I owned both places. As I recall, I took the loan out for the maximum duration allowed, but actually paid it back within a few months, once I sold the old place. The alternatives were to sell appreciated securities and take a tax hit, pay much larger fees for a conventional loan, or not move. It seemed best to pay a tiny fee and temporarily sell some 401k assets.

Your 401k plan may have different rules. Mine did not have any restrictions on paying back the funds early.

 

[Moemg]

I have a dumb question....why is it that the bride's family has to pay the whole thing? Other than tradition, it doesn't seem that smart financially.........

They don't have to I just offered .

 

[FIREd]

Well you can't raid the equity in your home anymore because of the RE/credit bubble, so what else can you raid to pay your bills if not your last remaining asset i.e. retirement accounts? Retirement is for wimps anyways... Plus there is always social security!

 

[mathjak107]

What happens to that 401K loan if you lose your job ?

you have to pay the loan back immeadiatly or pay a penalaty and taxes.

 

[Bestwifeever]

"I have a dumb question....why is it that the bride's family has to pay the whole thing? Other than tradition, it doesn't seem that smart financially........."

Actually, the groom's family shared the expense--we all just wanted to have a great party. And we (parents of the bride and groom) paid for our own wedding and school thanks partly to the GI bill and created a nestegg too back in the day.

I realize the original post is talking about hardship withdrawals and not 401K general purpose loans--it must be so difficult to be in that position. Anyone think the CFOs surveyed and higher ups are giving up their own bonuses if their employees are being given smaller bonuses this year?

 

[rocketdog]

Here's a stupid question: what is a 401(k) "loan" ? A 32 year old co-worker announced to me he planned to cash out his 401(k) for a down payment on a house. I told him it was usually a bad idea to cash out a 401(k), but didn't go into any details with him. I know taxes and penalties will reduce the amount he gets significantly if he cashes out. So, maybe he would find a "loan" useful?

 

[Puzzley]

Most 401(k) plans have a loan provision by which you can borrow from your account, and then begin making payments. You are, in effect, paying yourself, including interest. However, in my plan, for example, you cannot contribute to the plan duing your payback period. You should check with your plan administrator for more specific details. In general, while taking a loan is not a good idea because it is a detour in the road to retirement, it's better than cashing one out, by far...

 

[Sandy]

plus, if you have loan and leave the company, you generally have to finish off the loan in a lump sum, or pay taxes on the early distribution.

 

[rocketdog]

Thank you Puzzley, Sandy--I will pass along this information. I'll also try to talk him out of it by calculating what he would actually get if he cashed it out. I think he'll be shocked when he sees what taxes and a 10% penalty do to his distribution!
The loan wouldn't work, since the 401(k) is with a company he is going to be leaving soon.

 

[Bestwifeever]

For my plan you could take out up to $50,000 for a "general purpose loan" that has a 5-year payback period (the route we took for DD's wedding--certainly not the maximum, by the way). The interest you pay goes back in your own account, and you can keep making contributions during this period, too. You can also take out an undetermined amount to buy a house (it may be only good for your first house) that acts like a mortgage and must be paid back within a 30 year period. I don't know if that interest goes back in your own account but you can also keep making contributions during that period. Neither loans proceeds are taxable; neither loan has a penalty.

Neither one of these is cashing out or terminating--they are loans. A withdrawal (hardship, after retirement, whatever is allowed) is different. For my plan, when you take a withdrawal, you take money out of your account permanently. You may need to pay taxes on the amount you withdraw. You may also need to pay a penalty tax if the withdrawal is considered an early distribution from the plan.

Not advocating anyone to take out a loan like we did, but it did work for our circumstances....

 

[jazz4cash]

Most 401(k) plans have a loan provision by which you can borrow from your account, and then begin making payments. You are, in effect, paying yourself, including interest. However, in my plan, for example, you cannot contribute to the plan duing your payback period. You should check with your plan administrator for more specific details. In general, while taking a loan is not a good idea because it is a detour in the road to retirement, it's better than cashing one out, by far...

The 'loan' provision in our plan (and all plans) I believe is actually not a loan at all. The assets are sold and the proceeds provided to the employee. It's only a 'loan' in the sense that it must be repaid. The non-loan feature is significant because the liquidated assets cannot appreciate, so the borrower's 'cost' may be unknown. If possible, structure the loan from the fixed interest assets. Sometimes 401k funds can be rolled over to an IRA and then withdrawn penalty-free for firsttime home purchase

 

[rocketdog]

Hmm, it sounds like there is a lot of variation in how the 401(k) plans are administered. I guess it pays to look into all the angles. The amount of money in his plan isn't too big, he told me it would be about $5000. But this is the ONLY retirement account he has. He's 32, about to have a baby in a couple of months. He sees that I am retiring early, since I'm 52 and will retire at the end of December (yay!). He'd love to do the same one day, but it sure isn't going to happen if he raids his 401(k)!

 

[bamsphd]

The 'loan' provision in our plan (and all plans) I believe is actually not a loan at all. The assets are sold and the proceeds provided to the employee. It's only a 'loan' in the sense that it must be repaid. The non-loan feature is significant because the liquidated assets cannot appreciate, so the borrower's 'cost' may be unknown. If possible, structure the loan from the fixed interest assets. Sometimes 401k funds can be rolled over to an IRA and then withdrawn penalty-free for firsttime home purchase

The borrower's 'cost' is similar to investing the 401k into a stable-value fund, with the additional advantage that your loan interest rate is very good. However, I would certainly not advocate investing much of your 401k in a stable-value fund for very long.

The problem with rolling it into an IRA and then withdrawing if "penalty-free" is that there is no way to put the money back into the IRA, assuming you were already at the legal limit on your 401k and IRA contributions.

 

[jazz4cash]

The borrower's 'cost' is similar to investing the 401k into a stable-value fund, with the additional advantage that your loan interest rate is very good. However, I would certainly not advocate investing much of your 401k in a stable-value fund for very long.

The cost could be much higher depending on the source of the funds.
I believe a practical way to view these 'loans' is to consider the loss in growth of the assets liquidated to fund the 'loan'. So if the proceeds of the loan came from an asset that grew 10%/year, the cost of the loan would be 10% per year This 'cost' would be reduced a bit each year as the proceeds are replaced. Our plan lets us select individual investments to use for the loan....alternatively, you could re-allocate (out of the stable-value type) funds after taking the 'loan'

The problem with rolling it into an IRA and then withdrawing if "penalty-free" is that there is no way to put the money back into the IRA, assuming you were already at the legal limit on your 401k and IRA contributions.

I agree.....the 'loan' is better than the rollover for home purchase, but OP mentioned 'cashing out' 401k which I don't believe has exceptions for the 10% penalty...maybe depends on the plan.