During the coronavirus pandemic, millions of Americans have lost incomes and work.
As people initially scrambled to make ends meet, the CARES Act came onto the scene, allowing many Americans to withdraw money or take a loan against their retirement accounts — without incurring the typical 10% penalty — on up to $100,000. People started to take advantage.
But dipping into a 401(k) has consequences, such as increased tax bills and possibly sacrificing future retirement income. According to survey data of 1,902 US workers by Edelman Financial Engines, one in five Americans is considering taking an early withdrawal. But the survey also found that many Americans who have done it regret it.
55% of workers wish they hadn't taken money from their retirement accounts
According to the Edelman data, 55% of people who have borrowed from their accounts regret doing it.
For most borrowers, doing so was for an essential reason — 35% spent their funds on housing, and 7% took a loan due to a loss of income. However, some did so for less pressing reasons. About 20% borrowed to pay off credit card debt, and 8% funded a car purchase.
Borrowers admit they didn't understand the consequences or alternatives
Of people who borrowed, many admit not understanding the consequences of doing so, or not doing enough research on other options available.
When borrowing or withdrawing from a retirement account, there are a number of taxes, penalties, and regulations. While the 10% penalty is waived by the CARES Act, taxes on withdrawals are still high. And one of the other major consequences of taking a withdrawal is a smaller balance later in life. Edelman estimates that taking one $50,000 loan at age 45 can cut long-term balances by 15%, and a default on that loan could cut savings in half.
Many people say they regret their decision for this reason — about 41% of people who took hardship withdrawals and 42% who took a loan regret it because of a lack of understanding.
Others say they wish they'd understood the other options available. During the pandemic, many lenders have helped to ease the burden on Americans facing financial hardship. As part of the CARES Act, all federally-backed mortgages had the option of forbearance. Banks across the country offered help programs for loans ranging from mortgages to personal loans.
According to Edelman, some wish they'd turned to those programs before making a long-term dent in their retirement savings. Of people who took hardship withdrawals, 52% said they wish they'd explored other options first, while 44% of those who took a loan said the same.
Overall, most wish they'd consulted a professional before taking funds from their 401(k). Four out of five borrowers who regret the withdrawal or loan say that consulting a financial advisor would have helped their decision making.
This article originally appeared on Business Insider.
