As we see the economic depression is deepening and no end in sight or at least no light at the end of the tunnel. We are witnessing a dangerous trend as unprecedented number of Americans are facing unemployment and large amounts of debt relating to credit cards, mortgage loans and medical expenses, leaving them to exhaust all of their financial options to stay afloat. Now, this dangerous trend is leading to taking money in disproportionate amount from their IRA and other retirement funds. Of course there is a heavy penalty against such withdrawal but desperation does not see any rationale. This is a very dangerous trend, and we warn against this. Even though great hardship justifies it, but this money is basically for retirement only and not for your day-to-day consumer decisions. According to a new report from Fidelity Investments, a record-breaking number of its customers are borrowing against their 401(k)s.
According to the data, roughly 62,000 workers took out a hardship withdrawal from their 401(k) during the second quarter of the year, in contrast to the 45,000 from one year prior. The bank also noted that the 45,000 who took out a hardship withdrawal in 2009 took out another one during the second quarter of this year.
For the record, we should know that the Internal Revenue Service requires individuals requesting a hardship withdrawal to prove an immediate financial need to cover certain expenses, including payments to prevent foreclosure, certain medical bills and the costs of burial or funeral arrangements. Fidelity noted that hardship withdrawals can have a detrimental impact on an individual’s retirement and savings. This is especially true if they are younger than 59 1/2, as they will face a 10 percent tax penalty.
“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,” Fidelity’s Workplace Investing Unit president James MacDonald said.
Other Americans have resorted to borrowing against their 401(k)s, a move that has recently reached a 10-year high, according to the report.
Why we suggest against this because and IRA’s is a protected territory and is exempted from liquidation by creditors, and it should be only meant for one thing—your retirement.
However, if push comes to shove, and you really need to pull some money out of your IRA, do the following test and see if doing these steps can help you improve your financial life.
Stop paying secured debts and letting these assets go
Stop paying on your monthly credit card payments. Those can be handled later. Right now you have to set your priorities. However, if this act alone is not helpful then you can seek more alternatives below.
Take a deeper look at your home and pull out some comps from your neighborhood. No need of some emotional discussion here. Just do some hard financial analysis. Are you deep under water? Would a loan modification be helpful to you? If not, do some more analysis. Would moving to a smaller house and of course rental would help your situation. I suggest you look at the low end of the estimate provided by Zillow) versus how much you owe on it.
Many homes are worth less than the amount owed on them, or underwater. And with the real estate market in a free fall
The single most question is if the federal government can’t prop up the real estate market with all of its stimulus, what good is your 401K? Stop taking amount from it.
Again, this decision may ultimately require you to file bankruptcy because your home lender may be able to sue you for the difference between what your home is sold in foreclosure versus what you owe.
You have multiple cars, and paying lots of insurance for them. Of course, this is a tough time. Think carefully, maybe get rid of some of the cars. How bout’ having only car. Can you take the public transport? Can you afford these high payments.