When father-of-two Ivan Marusic lost his job overnight in 2020, he was left panicking about how he would cover his mortgage.
It prompted the 35-year-old, from Texas, to do something he never thought he would: withdraw $20,000 from his 401(K). It is a decision he is still paying for now.
‘I was really hesitant to do it because I knew it would set me back financially in the long run. But I didn’t have any other options. I had already maxed out my credit card and I was running out of money,’ Marusic, a tech worker who has since founded the website Game Taco, told Dailymail.com
This week, a report by Bank of America (BofA) sounded the alarm over a rise in workers taking ‘hardship withdrawals’ from their 401(K)s.
Some 15,950 of the firm’s 401(K) plan participants took a withdrawal from their accounts in the second quarter of the year. It marked a 36 percent increase from the same period in 2022.
This week, a report by Bank of America (BofA) sounded the alarm over a rise in workers taking ‘hardship withdrawals’ from their 401(K)s
Father-of-two Ivan Marusic, pictured, told DailyMail.com he is still paying for the hardship withdrawal he took in 2020, adding ‘It was a lifesaver at the time but I know I’ll have to pay the price for it later’
And a further 75,000 earners took a loan from their plan – meaning they will pay the figure back in five years.
The findings lay bare just how squeezed households have become amid rampant inflation – which is currently hovering at 3.2 percent – and soaring interest rates.
Anybody wishing to dip into their 401(K) before the age of 59 and a half has two options: they can either take a loan or a hardship withdrawal.
With the latter, a worker can only take it when they are in ‘immediate and heavy financial need’ such as an unexpectedly large medical bill. The amount must only be what’s necessary to cover this need.
They are then slapped with a penalty worth 10 percent if the withdrawal. Some exemptions exist – for example, if it has been agreed under a qualified domestic relations order.
But Marusic’s story should serve as a reminder as to how devastating this decision can be. As part of his hardship withdrawal, he was forced to pay out the 10 percent – or $2,000 – penalty that he will never see back
On top of that, he also has to pay levies on the withdrawal which is taxed as ordinary income.
And his retirement savings have been severely wounded – leaving him desperately trying to catch up now.
He said: ‘It was a lifesaver at the time but I know I’ll have to pay the price for it later. I’m still paying off the withdrawal but I’m finally in a better financial position as I have a new job and am able to save for retirement again.
‘I learned a valuable lesson.’
The other option for overstretched workers is to take a loan on their 401(K). This means they must repay whatever they withdraw – with interest – within five years.
Loans are usually permitted for up to $50,000 or half of your balance – depending which is lower.
Wealthy households have almost ten times more money saved for retirement than those on a middle income, according to figures from the Government Accountability Office
Financial planner Marissa Reale told DailyMail.com: ‘Taking a loan is better than a withdrawal because at least you pay it back slowly and keep on track for retirement.
‘But before that I would recommend trying to take a credit card loan first with 0 percent APR – this is a good option if your credit is good.
‘Otherwise homeowners can always consider taking an equity loan on their home – this is an option a lot of people don’t think about.’
Already experts are concerned that Americans are saving too little for retirement.
A landmark report this month found that wealthy households have almost ten times more money saved for retirement than those on a middle income. Analysis by the Government Accountability Office found that this gap had widened exponentially in the last two decades.
A high-income household has around $605,000 saved for their twilight years – compared to $64,300 in a middle-income home.
In 2007, these figures were $330,000 and $86,800 respectively.
On top of that, only one in ten low-income households have any money saved into a retirement pot – compared to one in five in 2007.
Reale said: ‘I think people really underestimate how much they need to have a good income for a 30-year retirement.’