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Spike in 401(k) loans and withdrawals

Thinking about tapping into your 401(k) early? Think again - at least if you want a shot at a secure retirement.

In a recent report, Fidelity Investments notes that the percentage of Fidelity customers who borrowed from their 401(k)s increased over the past year from nine to 11 percent. Currently, a whopping 22 percent of account holders - more than one in five - have an outstanding 401(k) loan. This amounts to approximately 2.5 million Americans, the highest level of people borrowing from their 401(k)s in 10 years.  

In addition, the percentage of Fidelity customers that have taken hardship withdrawals from their 401(k)s increased over the last 12 months. The company states

Fidelity has found that the average age of those taking a loan or hardship withdrawal is between 35 and 55 years old - a worker's peak earning years - when individuals often have to deal with multiple, competing, financial challenges. Distributions from a 401(k) or 403(b) are taxed as ordinary income, plus if you are under age 59½ you may be subject to a 10% early withdrawal penalty.

Why has there been such a spike in loans and early withdrawals? According to Fidelity, many who have been hit hard by the struggling economy used their 401(k)s to "prevent foreclosure or eviction, pay for college, or purchase a home." James MacDonald, Fidelity's President of Workplace Investing, remarked that for some people, taking money out early from their 401(k) was needed because it "may be their only form of savings."

As we've noted before, 401(k) loans and early withdrawals may be a short-term budget fix, but it might not be the best long-term strategy, especially if the 401(k) is your only retirement plan. The Fidelity data covers only accounts that the company manages, which leaves me wondering:  how many more Americans have taken loans or early withdrawals from their 401(k) plans? And what will any of them have left when it is time for them to retire? 

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