A new report from Fidelity Investments shows that the number of workers who are borrowing from their 401k retirement accounts has reached a 10-year high. Financial experts say that the combination of last effects from the recession, high unemployment and companies cutting back on worker's hours have left workers very unsure of their economic footing.
Boston-based Fidelity has $844 billion in retirement assets under management.
Fidelity also said that 11% of participants took out loans from their 401(k) over the past 12 months, an increase of two percentage points from the prior year. The average loan amount was $8,650 at the end of the second quarter.
The top reasons people took loans and made withdrawals were to prevent foreclosure or eviction, pay for college, or purchase a home, according to the firm.
401K's
If you are going to dip into it, you better do it before it is gone. The Democrats have our 401 K accounts in their sights of new money to spend. If you will remember the Clinton's brought this to our attention, but it fizzled out. Now Obama and his administration has it in their sights again, and they could just seize our money, promise us a check each month after we retire, and spend, spend, spend. That seems to be about the only thing our government can do right these days, is spend OUR money. But hey, "change" is always a good thing, isn't it?
At this time, it may not matter
The conventional rule is that loans from your 401k are ill-advised, because you pay the loan back with after-tax money and you may miss out on a surging bull market.
Um....what surging bull market is anyone forseeing at this time.....?
So, some things to consider - yes, you pay the money back with after-tax money that will be taxed AGAIN when you start drawing on your 401k, but you are paying the interest to YOURSELF. As long as the origination fees are reasonable, you will make more interest borrowing from your 401k than you will at any bank.
The market seems to be waning and if we are entering a bear market again (highly likely) then you have the advantage of re-purchasing the investments you sold off now at a lower price later.
As much as I think 401ks are a fantastic opportunity for the average investor, I think everyone should consider a Roth 401k if your company offers it. The same goes for your IRA - make it a Roth and here's why: The conventional thought behind a conventional IRA or 401k is that you will pay lower taxes in retirement, when your income is less.
HOWEVER, increased tax rates can quickly make up for any reduced income. With the way this country is plunging into debt, we will be facing two options in the future - repudiate that debt or raise taxes to punitive levels to service that debt. In that light, you may see your conventional IRA or 401k taxed at an alarmingly high rate in the years to come. So if you can afford to convert to a Roth, do it now. You can spread the conversion taxes over two years, but that goes away in 2012.