401(k) withdrawals spike

By Aaron Smith, CNNMoney.com staff writer


NEW YORK (CNNMoney.com) -- Hardship withdrawals from 401(k) retirement saving plans rose to the highest level in 10 years during the second quarter, Fidelity Investments said on Friday, in the latest sign of a dismal economy.

Fidelity reported that, as of the second quarter, 2.2% of all 401(k) participants had made a hardship withdrawal at some point over the preceding 12 months. That's up from 2% in the prior year, and was the highest level in 10 years.

At the same time, the percentage of 401(k) participants that had an outstanding loan from their account rose to a record high of 22% in the second quarter. The average loan amount was $8,650 at the end of the quarter.

Boston-based Fidelity has $844 billion in retirement assets under management.

The top reasons people took loans and made withdrawals were to prevent foreclosure or eviction, pay for college, or purchase a home, according to the firm.

"The current economy has forced some workers to borrow from their 401(k) accounts in order to pay for critical living expenses, ultimately jeopardizing their future retirement," said James MacDonald, president of workplace investing for Fidelity Investments.

He added that for some investors "taking a loan or a hardship withdrawal from their 401(k) may be their only option because it's their only form of savings. However, we want to make sure that before workers tap their retirement accounts prematurely, they are fully educated about both the penalty that may be incurred and the long-term implications for their retirement."

Fidelity said that withdrawals made by people younger than 59-and-a-half years old are taxed and are subject to a 10% penalty. The age of people making withdrawals ranged from 35 to 55.

David Wray, president of the Profit Sharing/401(k) Council of America, said that people making hardship withdrawals could pay a penalty of up to 40%, once state and federal taxes are added to the 10% penalty.

"People take a very significant hit when they take a hardship withdrawal," he said.

Wray said the increase in hardship withdrawals "is clearly directly tied to the economic situation and probably more specifically to the housing situation." But he also noted that nearly 98% of people with Fidelity 401(k) plans are not making withdrawals.

"It's important to keep in context that nearly all 401(k) participants are not taking hardship withdrawals," he said.

The penalties for hardship withdrawals are so high that participants should brace their finances ahead of tax time, said Beth McHugh, vice president of market insights for Fidelity.

"People should be prepared, because when it comes time to do their tax filing, that money is taxed as income," she said. "They need to make sure they keep some of that money aside so they can use it to pay their taxes instead of spending it."

Unlike withdrawals, loans are required to be paid back, with interest but without a penalty. Wray said the interest rate for most borrowers would be about 4.5%, to be paid back in five years. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 17,719.00 33.27 0.19%
Nasdaq 4,701.87 26.16 0.56%
S&P 500 2,052.75 4.03 0.20%
Treasuries 2.34 -0.02 -0.68%
Data as of 10:19pm ET
Company Price Change % Change
Intel Corp 35.95 1.60 4.66%
Kinder Morgan Inc 39.92 -1.02 -2.49%
Bank of America Corp... 17.00 -0.06 -0.35%
Apple Inc 116.31 1.64 1.43%
Yahoo! Inc 51.25 0.67 1.32%
Data as of 4:04pm ET

Sections

There are some of the standout vehicles on display this year at the Los Angeles Auto Show. More

Reggie Gray is one of many former FedEx Ground drivers who say the company illegally classified them as independent contractors rather than employees. More

Sarah Lacy, the journalist at the center of Uber's latest controversy, says misogyny isn't something people 'just grow out of.' More

When President Obama announces plans for immigration reform tonight, the tech community hopes he'll address visa policies for high-skilled, legal immigrants. More

Billionaires are on a buying spree in New York, with sales of multimillion dollar properties up 120% so far this year, according to CityRealty. And the prices are expected to keep climbing next year. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.