Cracking open your nest egg
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Tess Vigeland: You may have noticed there’s not a whole lot of good news in the show. Well, let’s keep going with that, shall we?
This week, Washington Mutual reported first-quarter losses of $1.1 billion. The nation’s largest savings and loan is chin-deep in the subprime mortgage mess. It’s also feeling the effects of customers falling behind on their bills. Delinquency rates are at a 16-year high on everything from home loans and credit cards to car payments.
Cash-strapped Americans are looking for money anywhere they can find it. Last year, nearly 20 percent of employees took out loans from their 401(k)s and the numbers are climbing.
Josephine Bennett tells us that once you tap into retirement funds, it can be tough to pay yourself back.
Josephine Bennett: There are two ways you can take money out of your 401(k): you can take what’s called a hardship withdrawal or you can take out a loan.
To qualify for a hardship withdrawal, you have to be facing what the IRS calls “immediate and heavy financial needs” — things like college tuition, medical expenses, buying your first home or foreclosure.
But if you’re just short on funds, you can take out a low-interest loan against your 401(k). Most employers allow people to take out up to $50,000. You have five years to pay it back and those deductions come right out of your paycheck.
43-year-old Anjanette Rumney worked as a nurse in the same Macon, Georgia hospital for 15 years. During that time, she was a regular contributor to her 401(k). The longer she worked, the more she saved.
Anjanette Rumney: You know I started off with just like 5 percent and then I went up to 7 percent so I got up to about 10 percent that I was saving and then the medical center would match that. So I had a pretty good amount in there.
At one point, she had close to $100,000 in her retirement account, but as a single mother with two boys, she still struggled to make ends meet, so she borrowed money from her 401(k) to pay off bills.
But then she changed jobs and here’s the catch: if you leave your job, the government only gives you 90 days to pay back the loan. If you don’t, you’ll be hit with taxes and a penalty.
What seemed like a good idea became a bitter pill this year when she paid her taxes. Anjanette lost nearly half the amount in taxes and penalties.
Rumney: As we all know that our economy, everything else, is going up and your paycheck isn’t and then when I didn’t get my money back that I was used to getting from my income taxes because I had to pay those penalties, it was like “Wow!”
Anjanette does not regret her decision. She says she needed to do it to avoid a disaster down the road.
57-year old John McIntyre has been a victim of corporate downsizing — twice — and both times he’s qualified for the 401(k) hardship withdrawal.
John McIntyre: I had to do it. There was no other way. I really couldn’t take out any loans at the time. When was I going to start to work? Was it going to be next week? Next month? Three months? Five months? Being at the age I was at — I was close to 50 — it was much more difficult to find a job.
As a result of those withdrawals, he’ll have to work a lot longer than he expected. He’s just starting to put a little back in savings.
Certified financial planner Steve Rosenberg knows people often have to make tough choices under fire, but he cautions his clients not to let emotions get in the way, even if they’re about to lose a home.
Steve Rosenberg: If you are facing foreclosure and effectively if the house is worth less than what you owe on it, then do you want to take the money out of your 401(k), which is protected from suits and things like that and do you instead want to just walk away from the house?
Rosenberg cautions his clients against borrowing from their 401(k)’s. He points to the current housing crisis as an important lesson:
Rosenberg: The problem is that people are treating their 401(k)’s like a bank. We know that’s a bad idea, because there’s already a model that shows how bad an idea that is and that’s people who have taken money out of their houses, refinanced, took out the money, spent it and they’ve blown their equity in their houses. If they take it out of their 401(k), they end up blowing their 401(k) too.
But with $49 billion in outstanding 401(k) loans, it’s clear that many Americans are willing to take that risk.
In Macon, Georgia, I’m Josephine Bennett for Marketplace Money.
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