Two out of every five Americans with retirement accounts have taken money out of them early, including more than 10% who have done so multiple times. And two in three haven’t paid back it back in full, according to new research from personal finance website FinanceBuzz.
To better understand how common early withdrawals from retirement accounts are and why people take them, FinanceBuzz researchers surveyed 1,000 U.S. adults. The survey sought to found out how many have taken money out of their retirement accounts early, how much they withdrew, why they needed the money, and more.
Beyond the top-line finding that 41% have taken money out of a retirement account early and 67% haven’t paid it all back (with a third of those having no plan to ever pay it back), the research found nearly a quarter of people (23%) regret taking the early withdrawal.
The average amount of money withdrawn by respondents who have taken money out of their retirement accounts early is $15,021.
FinanceBuzz notes these early withdrawals commonly come with a price for the account holder, as the IRS levies a 10% penalty on early withdrawals on top of taxes that typically need to be paid (though there are some ways to take early retirement withdrawals without penalty).
The vast majority of respondents who have taken money out of a retirement account early, 85%, said they had to pay these kinds of taxes and fees, while just 21% took money out as an untaxed loan, an approach that requires the full amount withdrawn to be paid back plus interest in order to avoid penalties.
Why are they taking these withdrawals? The survey found paying off personal debt such as credit cards and auto loans is the No. 1 reason, cited by nearly one-fourth (24%) of people who have taken an early withdrawal. Recurring bills is another reason, cited by 21% while making a major purchase was cited by 19%. Medical expenses and personal emergencies were each cited by 18%. Home repairs (11%) and offsetting a loss of income (10%) were the other top reasons.
Most unaware of SECURE 2.0 change
More than 80% of people surveyed were unaware they could take a tax-free $1,000 emergency withdrawal. The IRS allows a one-time, penalty-free withdrawal of up to $1,000 from a retirement account per year for emergency expenses. This new rule is part of the SECURE 2.0 Act of 2022.
The rule applies to regular retirement accounts, such as 401(k)s, but not Roth accounts. The withdrawal must be for an unforeseeable or immediate financial need related to a personal or family emergency. The IRS has a broad definition of what qualifies as an emergency.
The money must be repaid within 3 years, or income tax will be owed on the amount withdrawn. If the money isn’t repaid, the borrower won’t be able to make another penalty-free withdrawal for 3 years.
The full FinanceBuzz study is linked here.
SEE ALSO:
• 401(k) Loans Grow as Participants Struggle with Emergency Savings