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Tapping Nest Eggs

401(k) hardship withdrawals and borrowing rise, leading to worries that workers will have even less funds for retirement.

By Dave Lindorff | Updated on October 01, 2008

For Americans just scraping by, the only savings they’ve salted away are in a 401(k). That was fine in a growing economy. But now that it’s slumping, inflation is up and layoffs are spreading, a small but increasing number of people are tapping those accounts. T. Rowe Price says 401(k) withdrawals rose 19 percent last year through June 2008. Vanguard reports its hardship 401(k) withdrawals rose 22% in 2007. Though just representing 1.5% of all plan holders–these numbers are nonetheless troubling. Moreover, withdrawals aren’t the only threat to the 401(k) assets of 44 million American workers.

Since 2003, many plans have been offering debit cards, making it easy–though not necessarily wise–to borrow up to one-half of 401(k) plan assets or $50,000, whichever is less. Borrowing is not considered a withdrawal, which means for those under 59 1/2, no tax and no 10% IRS penalty. That is, unless the borrower misses three monthly payments on the loan or leaves the company before paying it off, making it a premature withdrawal.

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