More Utahns raid their 401(k) so Senate bill seeks to limit 401(k) borrowing
SALT LAKE CITY — Not only are more Utahns taking money out of their 401(k), but many of us are canceling our payments into the account. AAA Fair Credit Foundation President Preston Cochrane said, “People react quickly and maybe not as rationally as they should, in fear of falling behind. They look at that and feel it’s their last option.”
“Don’t react. Be rational and make sure you’re doing your homework and looking at all your options.” — Preston Cochrane
Cochrane says the money isn’t necessarily going to pay for large purchases or to bring down debt. He says people are using it cover regular, everyday expenses like food or bills. He says too many of us are strapped and our credit lines are maxed out.
“You’re kind of at the end of your rope,” Cochrane explained. “So, you look to see the pot of money that may be sitting in your retirement account and that might start to look very tempting in terms of access to cash.”
Cochrane says it would be a much better idea to take money out of our savings accounts instead of our 401(k) to avoid the tax hit that will come from taking money out of the 401(k). Plus, he says it’s also a better idea to sell assets, but many of us feel we’ve already sold what we can.
“Well, it’s hard to give up assets if you own them. So, in many cases, people are much more willing to withdraw money out of a 401k.”
How can we tell if it’s time to borrow from the 401(k)? Cochrane says every case is different. There are times when people are in extreme need; they have to cover their mortgage payment or put food on the table and have no other way to pay for it. The main thing Cochrane warns people to do is not to panic.
“We tell people, ‘Don’t react. Be rational and make sure you’re doing your homework and looking at all your options and not just taking your friend’s word for it.”
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May 18, 2011
Senate bill seeks to limit 401(k) borrowing
04:28 PM
By Michael Winter, USA TODAY
Bipartisan Senate legislation introduced today would limit how often Americans could borrow from their 401(k) plans but increase the repayment period after leaving a job.
The sponsors said the retirement accounts were increasingly being used as rainy-day “piggy banks” and not being repaid, contributing to a $6.6 trillion gap between what Americans have saved and what they will need for retirement.
The bill, sponsored by retiring Sen. Herb Kohl, D-Wis., and Sen. Mike Enzi, R-Wyo., seeks to reduce so-called leakage — when account holders cannot repay the money they borrowed from their 401(k)s.
“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,” Kohl said in a joint news release. He chairs the Senate Special Committee on Aging. Enzi is the ranking Republican.
The Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of 2011 — SEAL Act, for short — would:
* Reduce to three the number of loans that participants can take at one time. * Extend the rollover period for repayment after leaving a job. * Allow 401(k) participants to continue to make elective contributions during the six months after a hardship withdrawal. * Ban products that promote “leakage,” such as the 401(k) debit card.Read the full text of the bill (pdf). Bloomberg reports on a study released today showing that at the end of last year a record number of 401(k)-type participants had an outstanding loan — 28% — with an average outstanding loan balance of $7,860. The study of 110 plans found that 58% permitted two or more loans at a time.
May 27, 2011
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Tags: 401(k), AAA Fair Credit Foundation, More Utahns raid their 401(k), Senate bill seeks to limit 401(k) borrowing, USA TODAY · Posted in: Raiding 401(k) - Senate Bill Seeks to Limit, RETIREMENT
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