When father-of-two Ivan Marusic lost his job overnight in 2020, he panicked about how he would cover his mortgage.
This prompted the 35-year-old, originally from Texas, to do something he never thought he would do: withdraw $20,000 from his 401(K). It’s a decision he still pays for today.
“I was really hesitant to do this because I knew it would cost me financially in the long run. But I had no other options. I had already exhausted my credit card and was out of money. ‘, Marusic, a tech who has since founded the website taco gametold Dailymail.com
This week, a Bank of America (BofA) report sounded the alarm over a rise in the number of workers taking “hardship withdrawals” from their 401(K).
Some 15,950 of the company’s 401(K) plan participants made a withdrawal from their accounts during the second quarter of the year. It marked a 36% increase from the same period in 2022.
This week, a Bank of America (BofA) report sounded the alarm over a rise in the number of workers taking “hardship withdrawals” from their 401(K)s.
Father-of-two Ivan Marusic, pictured, told DailyMail.com he was still paying for the tough withdrawal he took in 2020, adding “It was a lifesaver back then, but I know that I will have to pay the price later ‘
And another 75,000 employees have taken out a loan on their plan, which means they will repay the amount in five years.
The results show how squeezed households have become amid runaway inflation – currently hovering at 3.2% – and soaring interest rates.
Anyone wishing to tap into their 401(K) before age 59½ has two options: they can either take out a loan or a hardship withdrawal.
With the latter, a worker can only take it when they have an “immediate and significant financial need”, such as a surprisingly high medical bill. The amount should only be what is needed to cover that need.
They are then hit with a penalty of 10% in the event of withdrawal. Some exemptions exist – for example, if this has been agreed under a qualified domestic relations order.
But Marusic’s story should remind us how devastating that decision can be. As part of his hardship withdrawal, he was forced to pay the 10% penalty – or $2,000 – which he will never see again
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 badly hit – 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 repaying the withdrawal, but I’m finally in a better financial position because I have a new job and can save for retirement again.
“I learned a valuable lesson.”
The other option for overworked workers is to take out a loan on their 401(K). This means they must repay everything they withdraw – with interest – within five years.
Loans are generally allowed for up to $50,000 or half of your balance – whichever is lower.
Affluent households have almost ten times more money saved for retirement than those on middle incomes, 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 are paying it back slowly and staying on track for retirement.”
“But before that, I would recommend trying a credit card loan with 0% APR first – it’s a good option if your credit is good.”
“Otherwise, homeowners can always consider taking out an equity loan on their home – it’s an option that a lot of people don’t think about.”
Already, experts worry 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 with middle incomes. Analysis by the Government Accountability Office found that this gap had widened exponentially over the past two decades.
A high-income household has about $605,000 in savings for its twilight years, compared to $64,300 in a middle-income household.
In 2007, these figures were $330,000 and $86,800 respectively.
On top of that, only one in ten low-income households have money saved in a pension pot – up from 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.”