401(k) Loans Common During Crisis
Posted by Richard on July 7, 2020
In March through June, many workers found some help from virus job losses and layoffs in a combination of savings, unemployment, and credit.
As July comes screaming in, what are the next steps if employment doesn’t return and government programs are not renewed?
Financial experts have urged people not to look to their 401(k) retirement accounts for loans. Although the maximum loan limit was increased as part of virus relief to $100,000 from $50,000, a retirement loan should be considered a last resort. If you borrow from your vested retirement savings, typically you have five years to pay it back.
A Bankrate study showed that 31 million people have tapped their plans already, or they expect to. As of May, 14 percent of Americans had used retirement funds. About 13 percent planned to do so.
For those unemployed during the COVID crisis, about 50 percent tapped retirement plans.
About 20 percent of Millennials hit their accounts as of May.
Overall, the majority have continued paying into their 401(k) accounts, although 18 percent contributed less due to the crisis.
According to Bankrate, younger households were most likely to turn to their 401(k), while older households were the least likely.
The top reason for not contributing to the 401(k) or cutting contributions was loss of income (62 percent). About 33 percent said they wanted to have cash on hand.
As you might expect, the 401(k) drain was concentrated among households making less than $50,000.
The big risk is default when you take a 401(k) loan. You’ll be slapped with a 10 percent early withdrawal fee and then taxed on the money. In a 10 percent tax bracket that could cost you $200 for every $1,000 you borrow.