Wednesday, May 14, 2014
In 2011, Americans paid $5.7 billion in 401(k) and IRA early withdrawal penalties to the IRS--a 37% increase over the past decade. These numbers signal that families on economic margins are less likely to have an emergency fund or home equity as a fall back.
Generally, taxpayers face a penalty if they withdraw money from a 401(k) or IRA before age 59 ½. The penalties often hit people under 35, who choose to cash out their 401(k)s when they switch jobs or when there is an economic downturn.
Although withdrawals and penalties were also spiked in 1991 and 2002, this time around is different because people’s homes were more likely to be underwater, ruling out home equity as a resource in an emergency.
However, with improvements in both the job and housing markets since 2011, there is a greater chance that early withdrawals have declined over the intervening years.
See Mattew Heimer, More Savers Are Making A Big IRA Mistake, The Wall Street Journal, May 9, 2014.