By Cyril Tuohy
Against the better advice of advisors who say it’s best not to dip into retirement savings, 29 percent of Americans who participate in a retirement plan say they have taken out a loan from the savings in their plan, according to a new survey.
Of the percentage of Americans surveyed, 44 percent who borrowed from their retirement plans lived to regret their decision. Among those who took out a loan, 43 percent have taken out two or more loans.
The findings are the latest figures delivered by a recent Teachers Insurance and Annuity Association of America-College Retirement Equities Funds (TIAA-CREF) survey.
“Too many people have struggled since the 2008 financial crisis and have looked at loans from their retirement plans as a way to ease financial stress,” Teresa Hassara, executive vice president of TIAA-CREF’s institutional business, said in a news release.
Dipping into a retirement savings plan is expensive because of the penalties associated with withdrawals and advisors generally caution against doing so.
Government rules are designed to deter people from dipping into their piggy banks to encourage investors to let their money grow tax-deferred.
Every dollar siphoned out of a retirement account is a dollar less that contributes to earning compound interest.
A withdrawal from an individual retirement account (IRA) before age 59 1/2 will sock an investor with a 10 percent early withdrawal penalty in addition to income tax on the amount withdrawn.
A worker in the 25 percent tax bracket who decides to take out $5,000 would end up paying $1,750 in taxes and penalties.
Early-withdrawal penalties are waived for withdrawals to pay for college, a first home, medical expenses, health insurance or a disability.
The top reasons for borrowing from retirement savings were for paying off debt (46 percent), paying for an emergency (35 percent), purchasing or renovating a home (26 percent), paying bills due to a layoff (24 percent), education (20 percent), and a special event such as a wedding or a vacation (15 percent), the survey found.
Women were more likely than men (52 percent versus 41 percent) to take out a loan to pay off debt, but men were more likely than women (40 percent versus 20 percent) to take out a loan to pay for an emergency expenditure, the survey also found.
"If loans are necessary to cover an emergency or the loss of a job, people should seek advice to minimize the loan's long-term impact on their retirement savings," Hassara said. "It's a good example of why plan sponsors should make financial education and advice a core component of their plans."
The survey, conducted online May 19 to 28 by KRC Research, polled 1,000 employed adults 18 or older contributing to a retirement plan.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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