Are 401(k)/IRA Withdrawals Replacing Second Mortgages?

Written By Jeff Hindenach
Last updated November 10, 2017

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May 21, 2016

Simple. Thrifty. Living.

In days past, most Americans treated their homes like gigantic piggy banks. When the property values went up, homeowners shook out as much capital as they could from their house-shaped banks and took out second mortgages to access a little extra dough. Unfortunately, after the 2008 housing collapse, making ends meet by taking out a second mortgage was not a realistic option for most people. Instead, Americans appeared to be flocking to 401(k) and IRA funds — scavenging their own nest eggs and worrying about the financial consequences later.

According to data collected from the Federal Reserve, in 2010, Americans made a record number of early withdrawals. Factoring in inflation, Uncle Sam made about 37 percent more money from these withdrawals than from withdrawals made in 2003. This same study reported that 9.3 percent of taxpayers who had IRAs and 401(k) accounts were being hit with penalties; this figure is up from 7.9 percent in 2004.

As families lost access to the financial buffer that houses had been providing, the only vein that could be tapped was the IRA and 401(k). Obviously, having money available in a time of need is handy, but the penalties can be draining. Early withdrawal penalties are leveraged to discourage people from raiding their retirement funds, but when financial hardships and economic woes reign supreme for American families, having enough funds now is what matters the most. Taxpayers may find it easier to overlook future financial pitfalls when facing more immediate concerns.

The IRS does make exceptions for certain types of 401(k) and IRA withdrawals. Workers over age 55 who have left their jobs can avoid penalties. Disabled taxpayers may also be able to make an early withdrawal. Also, certain qualifying medical expenses are excluded from penalties. First-time home purchases and higher education expenses also carry exceptions. Borrowing money from a 401(k) account is also an option, but this does carry some risk as workers may be required to pay back the loan in 60 days, if they leave their jobs.

Younger workers appear to bear the brunt of withdrawal penalties. 401(k) management giant Fidelity reports that workers aged 20 to 39 appear to be experiencing the highest cash-out rates. Job losses, family life events and other financial hardships are buffered by the possibility of securing a second mortgage. Unfortunately, these workers are not worried about penalties. Long-term financial consequences just don’t seem to be registering.

The numbers are in. It is obvious that more people are looking to IRAs and 401(k) accounts as a financial cushion, as opposed to second mortgages. All this cashing in by cashing out is leading to a huge tradeoff. These taxpayers depend on money from these funds for everyday needs.  Saving for the future is an unaffordable luxury.  According to a Gallup survey, 48 percent of working Americans plan to rely on retirement accounts as their primary source of income during retirement years. These people may have far fewer resources to draw from when they do retire, which means more of these taxpayers will be forced to rely on Social Security payments that may or may not be available.

About the Author

Jeff Hindenach

Jeff Hindenach is the co-founder of Simple. Thrifty. Living. He graduated from Bowling Green State University with a Bachelor's Degree in Journalism. He has a long history of financial journalism, with a background writing for newspapers such as the San Jose Mercury News and San Francisco Examiner, as well as writing on personal finance for The Huffington Post, New York Times, Business Insider, CNBC, Newsday and The Street. He believes in giving readers the tools they need to get out of debt.

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