Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

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Wednesday, January 30, 2013

401(k) 'Leakage'

IRAAccording to the Wall Street Journal, "one in four 401(k) participants has, at some point, raided his or her 401(k) savings to cover non-retirement expenses, including mortgages, college tuition, and credit card bills." This finding came from a study that was released in January. Of these participants that reportedly withdrew money from their accounts, they withdrew about $70 billion from their qualified plans. This is actually a significant leak when compared to how much owners placed into their plans.

Some argue that leakage occurs in three different forms: loans, hardship withdrawals, and cash-outs. One of these forms of leakage is worse than the others. Some argue that the worse kind of leakage is cash-outs. The reason that this is the worse kind of leakage is because account holders often are subject to penalties for cashing out too early. If the account holder is below the age of 59 1/2 and does not roll the amount into another qualified retirement plan, then they are likely to owe income tax and a 10% penalty on the cash-out sum. This is an unacceptable outcome considering that the reason that most people receive cash-out sums is because of poor money management problems. 

See Anne Tergesen, One in Four Savers Has 401(k) 'Leakage', MarketWatch: The Wall Street Journal, Jan. 15, 2013.

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