It’s a pretty terrible sign of the times when a record number of Americans are forced to plunder their 401(k)s.
“A record share of 401(k) account holders took early withdrawals from their accounts last year for financial emergencies,” reports the Wall Street Journal. “Overall, 3.6% of its plan participants did so last year, up from 2.8% in 2022 and a pre-pandemic average of about 2%.”
The whole point of a 401(k) is to keep that money out of reach until you reach age 59 ½ or above. Removing that money earlier is about the worst financial move anyone can make. The beauty of these retirement accounts is that 1) you defer your income tax on your contribution, and 2) you invest long-term and watch your money grow and grow over the decades.
Even if you qualify for an “emergency withdrawal” to avoid the ten percent IRS early withdrawal penalty, you still have to pay the income tax based on your present income level (I’ll explain why this is bad below). Worse still, you lose all the money that money would’ve made over a long-term investment. For example, withdrawing $20,000 twenty years early will cost you a fortune over those 20 years.
Forty-nine Senate Republicans and Sen. Joe Manchin (D-WV) unveiled a resolution that would eliminate President Joe Biden’s ESG investing rule, which may politicize 401(k)s. https://t.co/i8rkwayf4I
— Breitbart News (@BreitbartNews) February 1, 2023
Compound interest is a miracle. At an annual five percent interest rate, that $20,000 will be worth $54,000 in just 20 years. The stock market historically does much better than five percent over the long term.
Then there’s the income tax. If you remove the money now, you are taxed at your current income level. If you remove the money when you are supposed to, when you are retired, chances are your income will be lower, and you will pay a lower income tax rate.
Investing in a 401(k) is one of the smartest things Americans can do. If your employer doesn’t offer a 401(k), anyone can open an IRA at their local bank and enjoy all the same benefits.
On the flip side, the worst thing a person can do is remove that money early, and most people who invest in a 401(k) understand that. So, the desperation of an early withdrawal is truly desperate.
More from WSJ: “Emergency distributions hit back-to-back record highs in 2022 and 2023, according to Vanguard, which administers 401(k)-type accounts for nearly five million people[.]”
“Nearly 40% of those who took a hardship distribution last year did so to avoid foreclosure, compared with 36% in 2022,” adds the WSJ. “In 2023, more than 75% of hardship distributions totaled $5,000 or less, according to Vanguard.”
The skyrocketing cost of living has caused adult children to rely on financial support from parents, according to a study from the personal finance website Credit Karma. https://t.co/ygMJZi1Ufe
— Breitbart News (@BreitbartNews) December 22, 2022
At the end of 20 years, that $5,000 would have been worth $13,563.
Here’s good news, but not for those who removed their money: “Average account balances rose 19% in 2023, according to Vanguard, a welcome change from 2022, when falling stock and bond markets wiped 20% from the average 401(k) balance. “
Bidenflation is killing the everyday American. Like interest, inflation compounds, so if it’s seven percent one year and four percent the next, and the fake media tell you inflation is decreasing, that’s not true. That’s an 11 percent increase in the cost of goods.
Home prices, car prices, mortgage rates, $3.50 for a gallon of gas, $4.00 for a dozen eggs… People are getting killed out here, and now we have a record number forced to rob their own future.
But, hey, at least the mean tweets have stopped.
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