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Americans are raiding their retirement piggy banks to weather financial hardships such as unemployment, medical emergencies and buying a home.

And they're doing it even though borrowing a modest $5,000 can dramatically erode savings, according to a study released Wednesday by the Center for American Progress.

The study found workers in 2004 had $31 billion in outstanding 401(k) loans, compared with $6 billion in 1989. Between 1998 and 2004, an average of 12 percent of families with 401(k)s borrowed from them.

"They don't necessarily pay penalties. But the penalty is that they have fewer retirement savings," said Christian Weller, an author of the study.
A $5,000 loan, for example, could cut retirement savings by 22 percent even if the loan is repaid without penalty, according to the study. That's assuming the person has a $40,000 salary and is five years into a 35-year career.

One reason people are increasingly using 401(k) plans as a crutch is because they're easy to access compared with pensions and IRAs.

Typically, borrowers can repay loans within five years, 15 years for home loans, without penalty.

That doesn't mean people are raiding savings to go on shopping sprees. Middle-class families in particular are turning to retirement money to get through financial crises such as unemployment and medical emergencies, the study found.
When Rachel Hernandez took out a $7,000 loan from her retirement plan, for example, it was after her daughter was killed and she took time off to care for her grandchildren.

"I understood it was going to hurt my retirement, but it was something I had to do," said Hernandez, 46, of San Antonio.

People can typically borrow $50,000 or half the vested balance of their 401(k) accounts with favorable interest rates. Failing to repay loans on time typically incurs a 10 percent excise tax and borrowers must also pay income tax.

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<b>Americans are raiding their retirement piggy banks</b><br> by Supanee Srijaivang<br> <br> Americans are raiding their retirement piggy banks to weather financial hardships such as unemployment, medical emergencies and buying a home.<br> <br> And they're doing it even though borrowing a modest $5,000 can dramatically erode savings, according to a study released Wednesday by the Center for American Progress.<br> <br> The study found workers in 2004 had $31 billion in outstanding 401(k) loans, compared with $6 billion in 1989. Between 1998 and 2004, an average of 12 percent of families with 401(k)s borrowed from them.<br> <br> "They don't necessarily pay penalties. But the penalty is that they have fewer retirement savings," said Christian Weller, an author of the study.<br> A $5,000 loan, for example, could cut retirement savings by 22 percent even if the loan is repaid without penalty, according to the study. That's assuming the person has a $40,000 salary and is five years into a 35-year career.<br> <br> One reason people are increasingly using 401(k) plans as a crutch is because they're easy to access compared with pensions and IRAs.<br> <br> Typically, borrowers can repay loans within five years, 15 years for home loans, without penalty.<br> <br> That doesn't mean people are raiding savings to go on shopping sprees. Middle-class families in particular are turning to retirement money to get through financial crises such as unemployment and medical emergencies, the study found.<br> When Rachel Hernandez took out a $7,000 loan from her retirement plan, for example, it was after her daughter was killed and she took time off to care for her grandchildren.<br> <br> "I understood it was going to hurt my retirement, but it was something I had to do," said Hernandez, 46, of San Antonio.<br> <br> People can typically borrow $50,000 or half the vested balance of their 401(k) accounts with favorable interest rates. Failing to repay loans on time typically incurs a 10 percent excise tax and borrowers must also pay income tax.<br> <br> <b>About the Author</b><br> http://articlebankloan.blogspot.com/<br><br><font size="1" face="arial">Get <A HREF="http://www.freearticlehq.com/">Free Articles</a> for your web site, newsletter, or ezine at the <A HREF="http://www.freearticlehq.com/">Free Article Headquarters</A></font>.