More People Using 401(K) Funds As Piggy Banks

Even though the economy has begun to demonstrate occasional signs of life, many Americans are still feeling the sting of those darkest days. Millions of homeowners are struggling to pay mortgages they can’t afford and those that have walked away from underwater loans now have battle-scarred credit reports. So in order to stay afloat, more consumers are taking loans from their own retirement savings.

According to a report in the Wall Street Journal, the companies that run 401(k) programs are seeing double-digit increases in the amount of loans being taken out against folks’ own retirement funds. Vanguard Group says loans are up 14%, T. Rowe Price reports a jump of 11%. And overall, nearly one out of three people with 401(k) plans have outstanding loans.

Why are people so eager to crack open their 401(k)s? They’re quick — you can usually get the money in about a week — and cheap to process. They also require no credit check.

But while these loans are a temptation, especially when you’re strapped for cash, you are taking a big risk. If you suddenly lose your job, you’ve only got 60 days to pay that loan back in full. If you don’t, it’s counted as an early withdrawal, which means you’re also saddled with income taxes and penalties.

As we reported last month, a pair of Senators have proposed legislation that would make it more difficult to take out a loan against your 401(k). On the other side of the spectrum, it would give people longer to pay back the loan after they lose their job.

“While having access to a loan in an emergency is an important feature for many participants, a 401(k) savings account should not be used as a piggy bank,” explained bill co-author Senator Herb Kohl of Wisconsin.

In related news, the Wall Street Journal also reports on a new survey showing that more than half of Americans between the ages of 45 and 59 have not even tried to calculate how much money they will need when (and if) they eventually retire.

Loans From 401(k)s Are on the Rise As Investors Tap Their Inner Banker [WSJ]

Most Americans Haven’t Planned for Retirement and Other Areas of Concern [WSJ]