A record number of people are turning to credit cards and/or taking hardship withdrawals from their 401(k) retirement funds. They’re doing so to pay for reasons ranging from medical bills and to prevent losing their homes to job loss and tp meet the basic expenses of everyday life. Inflation and the overall increase in the cost of living is a major motivator.
Hardship Distributions Rise
Taking early distributions is essentially prioritizing short-term needs over long-term saving goals. The number of people utilizing hardship distributions has increased 36 percent over the last quarter.
Credit Cards Aren’t the Answer
Credit card debt has risen dramatically, topping $4 trillion for the first time ever. A full 60 percent of Americans are living pay check to pay check and using credit cards to make up for deficits in income. Hiring is down and job seekers are relying on credit cards until they find new employment. Statistics show that 22 percent of the population doesn’t have any savings. The upcoming holidays are exacerbating the situation, as people struggle to purchase Christmas gifts.
Early withdrawal from retirement accounts don’t come without a price. The IRS imposes a 10 percent penalty on early distributions before the age of 59.5 years of age. That’s in addition to the tax an individual will pay on the income. That doesn’t even count the overall loss to your retirement funds that can be extremely difficult to make up.
Seek Professional Advice
Before deciding to hit your retirement fund, speak with your accountant or a financial adviser to fully understand the ramifications of an early distribution. The experts can provide advice on alternative solutions. In some circumstances the IRS may waive early withdrawal penalties for situations that include a federally declared disaster, terminal illness, long-term care insurance, and domestic abuse. There are limits to how much can be withdrawn and other terms can apply. The rules are complicated and complex, but an expert can help anyone navigate the intricacies.
At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs. We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today (843) 347-0849 and discover why our clients return to Peavy and Associates, PC year after year!