More Americans are withdrawing from retirement savings accounts: BofA survey

Summary:

• Bank of America survey reveals a 36% increase in withdrawals from retirement accounts year over year.
• Financial pressures due to inflation contribute to the rise in withdrawals and borrowing.
• Withdrawals come with penalties and taxes, though some exceptions exist for specific purposes.
• Borrowing from retirement accounts as a loan involves paying oneself back within five years.
• Using retirement accounts as a last resort advised, due to the negative impact on future financial security.

Americans are tapping the retirement savings, pulling money out of their 401 keys at an alarming rate. Yahoo Finance's Carrie Hannon is here with the details.

Rising Withdrawals and Borrowing

Hi, yeah, I mean the new study came out this week from Bank of America showing that the number of people who have withdrawn from their retirement accounts has ticked up something like 36% year to year. This is a big number and it's not just people who are withdrawing from the retirement accounts, the escalation of people borrowing from the retirement accounts. Now it's their money, of course, why not? There's several reasons why this is a problem, but why is this happening? It's happening, is it indicative of a trend perhaps? Vanguard has seen similar things with their funds as has Trans America. This isn't the first study that is showing us this sort of uptick in people reaching into their savings for retirement.

Financial Stresses and Inflation

It's happening a lot because of the financial stresses of inflation are sort of lingering. It's coming to fruition right now and people are facing very high credit card debt and as we know credit card interest rates are phenomenally high right now and they're just feeling that pinch of not being able to make ends meet. This is a source of money that they're going to. How does this work? If you're withdrawing from your retirement account, if you're under 59 and a half, you are going to pay a 10% penalty and you're also going to pay ordinary tax on that money. Now there are some exceptions. The IRS says if you're making that withdrawal for maybe a first home purchase or some medical expenses that will be excused for this. There's some higher education opportunities that you can use this money for without having to pay the penalty.

Borrowing from Yourself

You'll still pay tax on it though. The people who are withdrawing and just taking the money out of their retirement accounts as a loan, they're borrowing from themselves. This is not great but it's not terrible because what happens here is that you pay yourself back and you generally have about five years to do that and you pay it back with interest. But that said the money does go back into a retirement account. Now there is a caveat here if you were to leave your employer while you have a loan, you may very well be asked to pay it back fairly quickly. That can be a problem and if you don't get it paid back within a certain time frame that your employer's plan requires you to do so, it will be considered a withdrawal and you'll face those taxes as well as that penalty. Kerry, what are some other things people need to consider before withdrawing from referral one take? You know, you just take a breath.

Think Before You Withdraw

This should be a place of last resort because you don't want to be using your retirement accounts as a savings account. So if possible, if you can have an emergency savings account, really work to build that up because this should be your last resort for a lot of reasons. As I said, the borrowing from yourself isn't as traumatic but when you actually withdraw it, you are really setting yourself back for your future financial security because you know that money's gone. It's no longer gathering, compounding interest, you're no longer automatically putting your savings in there necessarily and it's really gone for good. And I got to say, I mean, on a personal note, I did this myself. When I was 29 years old, I took money out of my 401k plan to pay back credit card debt, right? And I regret that to this day because it wasn't a lot of money but when I think of what, if I had left it alone over all these years, what that could have possibly amounted to at this point, it's just staggering and I just want people to, you know, you really need to think it through before you tap into these accounts. Certainly very important advice there.

Kerry Hannon, thanks so much.

Kerry Hannon, thanks so much.