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More Americans With Retirement Funds Are Borrowing From Them
A troubling trend in this time of economic recovery as banks issue fewer loans, more Americans are lending to themselves by tapping their 401k's or retirement funds.
Once considered a last resort, nearly a quarter of Americans with retirement funds are now borrowing from their own retirement savings. Most are making a down payment on a new home, paying off debt or buying a new car.
In the past, consumers got the money by borrowing on the equity of their home or used savings.
Financial advisory firm Hello Wallet data shows withdrawals, cash-outs and loans drain nearly a quarter of the billions deposited into 401k accounts each year.
"Taking money out of your 401k is a mistake because not only do you have to pay an early penalty, you also have to pay taxes on that distribution based on that tax rate," Matt Klocke with the Klocke Capital Group in Palm Beach, Fla.said.
Klocke says the new trend of pulling from your retirement needs to be discouraged.
Managing $2 trillion in 401k assets, Vanguard Investments' report shows a 12 percent increase in the number of workers who took loans or withdrew money outright from 401k's since 2008.
Once taboo to do so, 401k's are now routinely seen as easily borrowing from oneself without the hassle of a certified bank loan.
"I don't believe there is a good reason to take money out of your 401k because you are investing for the long term there is no reason to take your money out early. It's a long term investing vehicle that should not be used for the short term," Klocke said.
The number of people cashing out entire 401k's when they switch jobs is also on the rise.