More than one-third of workers with 401(k) plans admit to taking money early from the account, according to a recent survey from the Transamerica Center for Retirement Studies.
One of the perks of having a 401(k) plan is that you can tap the funds in times of need.
These retirement savings plans offer a few ways that you can get quick access to cash:
- A 401(k) loan. IRS rules allow 401(k) participants to borrow up to 50% of their vested account balance or $50,000, whichever is less. Not all 401(k) plans allow loans, although many do.
- A 401(k) early withdrawal or hardship distribution. An early withdrawal occurs when you take the money prior to age 59½, and it might trigger an additional 10% tax. Hardship distributions allow you to take out the money early if you have an “immediate and heavy financial need.” The IRS offers more guidelines for these options on its website.
As it turns out, more than one-third of those with a 401(k) plan — 37% — have used one or both of these techniques to tap into their accounts, the survey found.
Overall, 30% of participants have taken a loan and 21% have taken either an early withdrawal or hardship distribution.
A majority of 58% of survey respondents said they never have taken money from their 401(k) prematurely. And, in a head-scratcher, 5% said they aren’t sure.
Transamerica collected the survey data from more than 10,000 adults.
Should you take money prematurely from your 401(k)?
Of course, just because you can take money out of a 401(k) plan early doesn’t mean you should.
As we have pointed out in the past, there may be instances where a 401(k) loan makes sense. But in general, financial advisers frown on taking money out early. They often warn that doing so can rob you of years of potential compounding of savings in your account, leaving you poorer during retirement.
In addition, some types of early withdrawals trigger both taxes and a 10% early withdrawal penalty.
In its report, Transamerica characterizes the high percentage of those taking money from their accounts prior to retirement as “concerning.”
However, if you are facing tough financial circumstances, withdrawing money early from your 401(k) can provide a lifeline during a difficult time.
Of course, it’s almost always better to find another way to get money if you need it right away. For more suggestions, check out “9 Top-Paying Side Hustles Where You Could Earn More Than Full-Time Work.”