Taking a short break from my posts on behavioral finance for Gen Y, I wanted to highlight an article I found regarding a study to be published by mutual fund giant Fidelity Investments today. The study says that during the second quarter, workers both increased hardship withdrawals from their 401(k) retirement accounts, and borrowed money from those accounts at a 10-year high.
What are hardship withdrawals? As the name suggests, the IRS allows you to take a distribution from a 401(k) retirement account before your mandatory disbursement age of 59 1/2 if certain circumstances arise. Unfortunately, this does not occur without penalty as you incur both income tax on the withdrawal and are subject to a 10% withdrawal penalty you must forfeit if you are not at least 59 1/2. Circumstances upon which you can take a hardship distribution include: certain medical expenses, payments to prevent home eviction or foreclosure, repairing damage to a primary residence and purchase of a primary residence, among a few others.
Secondly, the pitfalls of too much credit card debt are well documented. You don't need me to tell you why borrowing from a retirement account just isn't a sound investing strategy.
This study is particularly important for Gen Y because it proves just how important proper planning is. After all, if people need to tap their retirement accounts before their disbursement age and know that they will incur a 10% penalty in the process, it's likely that they simply didn't plan ahead well enough. As Gen Y's, we are young enough where we can still learn from the mistakes of others. A 401(k) is for retirement, not for dealing with day to day living expenses.