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Thursday, July 31, 2008

Is It Open Season on the 401(k)?

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In yet another troubling sign for the U.S. economy, more Americans are borrowing against their 401(k) retirement plans to make ends meet. What’s more, some banks are making it easier by offering people debit cards that tap into their retirement funds.

“The point is that 401(k) and similar contribution plans were created to ensure that people would have adequate savings for retirement, not as a source of credit to use casually,” said Wisconsin Sen. Herb Kohl in a statement. “These debit cards allow a participant to use his or her retirement savings to make everyday purchases like buying a cup of coffee. Clearly that’s not what the 401(k) is for.” Kohl and New York Sen. Chuck Schumer recently introduced legislation that would bar banks from offering debit cards that raid customers’ retirement savings by borrowing against their 401(k) accounts.

At a recent Senate committee hearing, Schumer pointed to estimates that for every $1,000 an American withdraws from his or her 401(k) plan, $10,000 of retirement income is lost. “It’s a really, really bad idea to borrow from your 401(k),” said Laura Retzer, 401(k) plan administrator for Briggs & Stratton in Milwaukee. “This is the time when you want to keep your money in the market, when the market is down. You need to think long-term.”

Retzer said 401(k) borrowers are taxed twice on their savings. “Most people don’t realize it, but you’re paying back the loan with after-tax income,” she said. “And when they withdraw at retirement, you’re taxed again.”

According to the Center for American Progress, the amount of money borrowed from defined-contribution retirement plans rose five-fold between 1989 and 2004, from $6 billion to $31 billion, in inflation-adjusted terms. Borrowers surveyed for the study cited unemployment, medical costs and home purchases as the most common reasons for tapping their retirement funds.

Definition of the Week

What Is Forecasting? “Forecasting” is another word for economic experts’ best guesses about the future. Despite complex economic theories and cutting-edge econometrics, the forecasts economists make are often far off target. (Source: Economist.com)