- Americans are increasing their retirement savings, according to a Vanguard study.
- This could be a sign of consumer financial distress under the weight of 40 years of inflation.
- Advisors warn that this may not be the best way to make a quick buck.
Americans feeling rising inflation are raiding their retirement savings, an ominous sign for a nation already struggling to save for old age.
The share of workers taking money from their employer’s retirement plan for new loans, hassle-free withdrawals and hardship waivers all increased this year, but “the “The biggest concern is the increase in withdrawals,” said the Vanguard Group, which oversees five million depositors.
People can join the 401(k) plan to borrow up to $50,000 as a loan to be paid back into their account, or take a hassle-free leave while they are still working on their business. But if they withdraw money without a significant and serious financial need (this may be a difficult withdrawal), they may pay a penalty of 10% of the withdrawal, and the IRS may withhold 20% of the withdrawal. money taken for taxes.
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The share of those leaving 401(k) retirement plans reached 0.5%, the highest since 2004 when Vanguard began tracking the data, he said.
A hard pull is often a last resort for people who need money, and it can be an indication of the depth of the customer’s financial difficulties. They are only allowed to cover “immediate and pressing financial needs,” according to IRS rules, and are subject to income tax and a possible 10% early withdrawal penalty. For a $10,000 hardship withdrawal, for example, a taxpayer in the 22% bracket would have to pay $1,000 in penalties plus $2,200 in income taxes.
“We know that inflation has eroded the purchasing power of workers and can cause strain on family budgets,” said Tom Armstrong, vice president of customer analytics & insight at Voya. Finance., pension, investment and insurance companies.
And if there is no emergency fund, the fallback plan is often the retirement egg. Workers with no emergency savings are 13 times more likely to make hardship withdrawals and three times more likely to take out a loan against their retirement plan, according to Voya data.
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When it comes to money, is dipping into retirement savings a good plan?
Not if you can help it.
“While we understand that, in some cases, people may have no choice but to tap into their retirement accounts, it’s important to remember that people work hard for their savings in ‘retirement and should enter them as a last resort,’ said Armstrong.
Hardship withdrawals can give you immediate access to cash, but it has serious financial implications. The focus is not on immediate taxes and penalties, but on long-term retirement benefits.
You may not be able to contribute to your employer’s pension plan for six months or more, and you may lose the growth of your investments, says Nilay Gandhi, an investment adviser. the treasure of the Vanguard. Compounding grows your money because you get a return on your original investment and on the returns you previously earned on that investment.
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But if you must hit your retirement savings, you might want to consider these two options first, Gandhi says:
- Loans from your 401(k). If your plan allows for loans, they must be paid back into your retirement account, so you pay yourself and don’t lose money. The money is also tax-free if the loan meets the requirements and the repayment schedule is followed, the IRS said. Note that the loan is limited to 50% of the account balance or $50,000, whichever is less if half of the balance is less than $10,000. Also, “we are careful that these funds are taxed and penalized if you can’t pay the loan and it comes when you leave work,” said Armstrong.
- Withdraw money from a Roth IRA. Because you contribute to a Roth IRA with pretax money, qualified withdrawals from your contributions are tax-free and penalty-free in any year.
How can I earn money without leaving my retirement savings?
Before investing in retirement savings, consider some of the following options:
- Savings. An emergency fund is mainly for unexpected expenses. So, if you have, this should be the first place to turn.
- bank loan. If you have a one-time expense and good enough credit to qualify for a low interest rate, a personal loan can be a great option for quick cash.
- Home Equity Line of Credit (HELOC), if you own a home. You use your home as collateral to get a line of credit that you can use. You only pay interest on what you borrow, and interest may be deductible if the money goes toward home improvements. Be aware that they often have variable interest rates and fees, and the Federal Reserve is currently on an aggressive hiking cycle to slow inflation.
- Additional work. “If you can get a part-time job. many companies are still looking for people at attractive hourly rates,” Gandhi said. Today, there are also several side hustles that people can do at home, such as selling items on eBay or Etsy.
- Credit card with 0% interest on purchases. “You can use one of these special services for 12 to 18 months to cross the bridge, that way,” Gandhi said.
- Traditional brokerage account. Although most investments are down this year, there may still be a few winners you can pull off. The funds are subject to capital gains tax, but if you have a loss, you may be able to sell these investments and apply them to your gains to lower your tax bill.
- A flexible and healthy savings account, if the money you need is to meet your medical expenses.
- Borrow from family and friends.
Medora Lee is USA TODAY’s fundraiser, markets and special fundraiser. You can reach him at [email protected] and sign up for his free Daily Money newsletter for personal financial tips and business news every Monday through Friday morning.