Ways people raid their 401Ks and why you shouldn't do it
(CBS News) A recent study by HelloWallet, a personalized financial guidance startup company, shows one in four Americans is using a 401K retirement account to pay for current expenses. Most advisers will tell you that borrowing from your future is a risky move.
However, if you do decide to borrow from that account you can do it a few ways, such as through a loan or a hardship withdrawal, Jill Schlesinger, CBS Moneywatch editor-at-large, explained on "CBS This Morning."
If you decide to loan yourself money, you have to repay the money through payroll deduction within five years. However, this financial move carries a heavy risk. "If you leave or you get fired or laid off, that loan has to be repaid within 60 days," she said. "If not, you get whacked. It's considered a distribution from the plan. Loans can be dangerous."
Another way people dip into their 401K plans is in situations of hardship. The IRS considers some life events eligible for this, such as a disability, a medical bill payment, a death, a mortgage payment, or an education bill.
"You've got to prove it," Schlesinger explained.
The withdrawal is taxed, she warned. Also, you have to pay a penalty of 10 percent if you're under the age of 59-and-a-half, though there are some events that qualify to get a waiver of that 10 percent penalty. Schlesinger said, "Either way, a loan or withdrawal, even if it's a hardship withdrawal is a real last step in your financial life. You don't want to do that."
People are dipping into their 401Ks for a variety of reasons, according to Schlesinger. "I think people were very damaged in the recession and they didn't have a lot of choices," she said. "Some people did qualify for the hardship withdrawals. Some realize the loan might be better, but, again, these are the last measures. We don't want you to do it."
For more discussion on 401Ks, particularly as it relates to Social Security, watch the video in the player above.