Dangers of early 401(k) or IRA hardship withdrawals on clarkhoward.com

With the hard economic times, many people have taken to raiding their retirement savings without fully understanding the repercussions.

In fact, The Wall Street Journal reports that 401(k) hardship withdrawals have tripled in just 6 months.

The typical person who taps into their 401(k) or IRA before they've reached retirement age will generate a tax bill plus penalties that can be up to 40 cents on the dollar.

So let's say you get laid off from your job and cash out a $10,000 retirement plan. After you spend it, you then get a tax bill for $4,000, plus you have zero in retirement and you have to start all over again.

To share a quote from The Wall Street Journal article, "Making an early withdrawal should be a last resort, 'somewhere right before homelessness and/or starvation.'"

Of course, there are narrow circumstances where you can withdraw money and only pay tax and no penalty. These include buying a first home and for select educational expenses. But the circumstances are little understood by the average person and all too often disregarded.

What others are saying

Avoidance of tax & penalty
I appreciated the suggestion of rolling the 401K over to an IRA, and then using it for school. We will probably do that. Fortunately we have a daughter in college so we were already able to cash out an IRA that we paid to her college. She took out a school loan, and was given the balance in her account. She then loaned us the money equal to our 401K to help us over the hump. We will end up paying her school loan back. I am also contemplating going to graduate school in the fall and will be able to cash out my IRA. Since we have been living on unemployment most of this year our taxes will be negligible so it's a win win for all of us. There are creative ways in all of this. But, needless to say after my husband went through the loss of 401K contributions and Med Flex account monies b/c his employer went bankrupt we will never go that route again....
By Nancy @ 07/24/09 06:10:52 PMreport abuse
rate or return
Over the last 10 years rate of return in the stock market has been an average of 2%. With all the finicial scams that take place these days an ordinary investor has no chance, huge regulations are need to help average investors get a leg up.
By Joe @ 06/08/09 08:01:00 AMreport abuse
don't worry, be happy
Why all the worry about finances?
Our dear One will take care of everything. You must BELIEVE in Hope & Change! The increased taxes on the rich will subsidize the regular folks and their retirements. It is coming to pass just as He said it would during His campaign. Yes We Can !!
By follower of the chosen one @ 06/07/09 09:09:03 PMreport abuse
Security
Comrades- please do not concern yourselves about your "nest egg". The concept is an antiquated capitaistic illusion. Soon, every man, woman, and transgendered individual, at the age of 70, will be provided the very best government-backed retirement plan in the world! Coupled with free healthcare, you will be freed from many of the difficult decisions you make today and would face in the future. This glorious day is fast approching, Comrades. My Allah bless the USSA!
By socialism Stan @ 06/05/09 09:12:56 AMreport abuse
401k
I have been out of work for 14 months now, and am retraining for another job at age 50 to prepare to enter a very hostile job market. I struggled to get out of debt when I saw this coming, and am completely debt free now, and I intend to never borrow another cent as long as I live. Forty cents on the dollar doesn't sound that bad compared to going into debt to me. I hate to compromise my retirement by draining my 401k, but the future is no better for a senior citizen debtor than it is for an impoverished retiree.
By dave @ 06/04/09 07:52:29 PMreport abuse
401(k)
If you are in a severe financial situation, step back and ask yourself if you seriously think you can recover. Most people drain their 401(k) before dropping off into bankruptcy. However, 401(k) assets are safe from bankruptcy. Is it better to drain all resources, then declare bankruptcy & have nothing left for retirement?

Taking money from a 401(k) is a bad idea. It really shouldn't even be a last resource. Most people in bad financial situations don't stop to consider the consequences of tapping their retirement accounts - they just grasp at any hope of redemption instead of facing reality.
By Andy @ 06/04/09 12:21:22 PMreport abuse
I did it.
Am early 60's work full time and just diagnosed with Breast cancer. $2,500 was what I had to meet and amassed that amount in no time. Withdraw $4000, received $3,200 - and paid off all my doctors so I owe no one (until the first of the year!) Saved me a lot of stressing out as to how to pay them all something each month.
By LRM216 @ 06/04/09 10:19:16 AMreport abuse
401K withdrawal
I have $10,000 on Discover that I could have paid off instead of losing the $19,000 I did over the last year. I am 62, so no penalty - just the taxes. Oh well, too late now, but if I knew then what I know now, I sure would have done it.
By Sparkler @ 06/04/09 10:16:36 AMreport abuse
Will it be worth it?
Being in the my mid 40s I often think weather or not an IRA or 401K is really worth it anymore. Given what tax rates will probably be when I am 59.5 would I be better off just saving and investing after tax dollars?
By anonymous @ 06/04/09 09:20:52 AMreport abuse
button my mouth
while i agree that it makes no sense to cry over spilt milk, people who get laid off from work and have to spend retirement money to survive need to come up with a plan to never have to be in that position again, or at least severely lessen that risk. How you ask?
Everyone in addition to saving 10% of gross pay for retirement should have another 5% of their gross pay put away to build up a rainy day fund equal to 6-12 months of living expenses and that is not counting any unemployment benefits. That way a family can survive for 12-16 months or so without any income except unemployment benefits and not have to worry about moving under a bridge and living in a cardboard box. Think about that. And adjust your financial lifestyle once you get back to work if you are now out of a job and if you still have a job, immediately implement that saving plan. If that means selling that SUV and buying a 10 year old car, do it. If that means dumping the cable tv, fancy i-phone plan, spendy vacations, dining out, etc., etc.,etc., do it. You will be rewarded with financial security.
The likelyhood of then suffering a real financial calamity falls to a very low level then. Not eliminated, but substantially reduced.
Remember, excuses are like belly buttons...everyone has one.
By brian @ 06/03/09 07:32:11 PMreport abuse
Early withdrawal
In this economy, it is all we have left. People with decent jobs should maybe button their mouths so the rest of us can eat and try to keep our home, while waiting on the businesses to decide to hire Americans again.
By Traci @ 06/03/09 05:42:50 PMreport abuse

Avoidance of tax & penalty

I appreciated the suggestion of rolling the 401K over to an IRA, and then using it for school. We will probably do that. Fortunately we have a daughter in college so we were already able to cash out an IRA that we paid to her college. She took out a school loan, and was given the balance in her account. She then loaned us the money equal to our 401K to help us over the hump. We will end up paying her school loan back. I am also contemplating going to graduate school in the fall and will be able to cash out my IRA. Since we have been living on unemployment most of this year our taxes will be negligible so it's a win win for all of us. There are creative ways in all of this. But, needless to say after my husband went through the loss of 401K contributions and Med Flex account monies b/c his employer went bankrupt we will never go that route again....

By Nancy @ 07/24/09 06:10:52 PMreport abuse

rate or return

Over the last 10 years rate of return in the stock market has been an average of 2%. With all the finicial scams that take place these days an ordinary investor has no chance, huge regulations are need to help average investors get a leg up.

By Joe @ 06/08/09 08:01:00 AMreport abuse

don't worry, be happy

Why all the worry about finances?
Our dear One will take care of everything. You must BELIEVE in Hope & Change! The increased taxes on the rich will subsidize the regular folks and their retirements. It is coming to pass just as He said it would during His campaign. Yes We Can !!

By follower of the chosen one @ 06/07/09 09:09:03 PMreport abuse

Security

Comrades- please do not concern yourselves about your "nest egg". The concept is an antiquated capitaistic illusion. Soon, every man, woman, and transgendered individual, at the age of 70, will be provided the very best government-backed retirement plan in the world! Coupled with free healthcare, you will be freed from many of the difficult decisions you make today and would face in the future. This glorious day is fast approching, Comrades. My Allah bless the USSA!

By socialism Stan @ 06/05/09 09:12:56 AMreport abuse

401k

I have been out of work for 14 months now, and am retraining for another job at age 50 to prepare to enter a very hostile job market. I struggled to get out of debt when I saw this coming, and am completely debt free now, and I intend to never borrow another cent as long as I live. Forty cents on the dollar doesn't sound that bad compared to going into debt to me. I hate to compromise my retirement by draining my 401k, but the future is no better for a senior citizen debtor than it is for an impoverished retiree.

By dave @ 06/04/09 07:52:29 PMreport abuse

401(k)

If you are in a severe financial situation, step back and ask yourself if you seriously think you can recover. Most people drain their 401(k) before dropping off into bankruptcy. However, 401(k) assets are safe from bankruptcy. Is it better to drain all resources, then declare bankruptcy & have nothing left for retirement?

Taking money from a 401(k) is a bad idea. It really shouldn't even be a last resource. Most people in bad financial situations don't stop to consider the consequences of tapping their retirement accounts - they just grasp at any hope of redemption instead of facing reality.

By Andy @ 06/04/09 12:21:22 PMreport abuse

I did it.

Am early 60's work full time and just diagnosed with Breast cancer. $2,500 was what I had to meet and amassed that amount in no time. Withdraw $4000, received $3,200 - and paid off all my doctors so I owe no one (until the first of the year!) Saved me a lot of stressing out as to how to pay them all something each month.

By LRM216 @ 06/04/09 10:19:16 AMreport abuse

401K withdrawal

I have $10,000 on Discover that I could have paid off instead of losing the $19,000 I did over the last year. I am 62, so no penalty - just the taxes. Oh well, too late now, but if I knew then what I know now, I sure would have done it.

By Sparkler @ 06/04/09 10:16:36 AMreport abuse

Will it be worth it?

Being in the my mid 40s I often think weather or not an IRA or 401K is really worth it anymore. Given what tax rates will probably be when I am 59.5 would I be better off just saving and investing after tax dollars?

By anonymous @ 06/04/09 09:20:52 AMreport abuse

button my mouth

while i agree that it makes no sense to cry over spilt milk, people who get laid off from work and have to spend retirement money to survive need to come up with a plan to never have to be in that position again, or at least severely lessen that risk. How you ask?
Everyone in addition to saving 10% of gross pay for retirement should have another 5% of their gross pay put away to build up a rainy day fund equal to 6-12 months of living expenses and that is not counting any unemployment benefits. That way a family can survive for 12-16 months or so without any income except unemployment benefits and not have to worry about moving under a bridge and living in a cardboard box. Think about that. And adjust your financial lifestyle once you get back to work if you are now out of a job and if you still have a job, immediately implement that saving plan. If that means selling that SUV and buying a 10 year old car, do it. If that means dumping the cable tv, fancy i-phone plan, spendy vacations, dining out, etc., etc.,etc., do it. You will be rewarded with financial security.
The likelyhood of then suffering a real financial calamity falls to a very low level then. Not eliminated, but substantially reduced.
Remember, excuses are like belly buttons...everyone has one.

By brian @ 06/03/09 07:32:11 PMreport abuse

Early withdrawal

In this economy, it is all we have left. People with decent jobs should maybe button their mouths so the rest of us can eat and try to keep our home, while waiting on the businesses to decide to hire Americans again.

By Traci @ 06/03/09 05:42:50 PMreport abuse

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Jun 03, 2009 -- Dangers of early 401(k) or IRA hardship withdrawals

What others are saying