30% Of People With A 401(k) Have Taken Out A Loan Against It: New All Time Record

Tyler Durden's picture

About a year ago Zero Hedge posted an article titled: "Record Number Of Americans Using Retirement Funds As Source Of Immediate Cash" after a report by Fidelity uncovered that "plan participants with loans outstanding against their 401(k) accounts had reached 22 percent versus 20 percent a year earlier." It is now time to revisit this very important topic because if recent press reports are true, last year's record number has just increased by another 50%. "On "The Early Show" Thursday, financial journalist and Newsweek
columnist Joanne Lipman said, "Right now we have 30 percent of people
who have 401(k)s have loans against their 401(k)s, which is a historic
high. And the problem is, it's growing like crazy: By 2014, we're
expecting to see 30 million people take loans against their 401(k)s
." The raiding of the last ditch piggybank is on, and who can blame them? With banks setting the example of always reverting to the Discount Window (or the Excess Reserve stash as is now trendy) when in trouble, ordinary working Americans are merely following in the footsteps of their financially more "literate" betters. Unfortunately, unlike the "depositor" institutions, nobody will replenish these funds should they not be repaid and the retirement money is gone for good.

CBS News explains why raiding your 401(k) is so easy a caveman can do it:

Sheri Chaney Jones, of Columbus, Ohio, started a consulting business in October and borrowed from her 401(k) to help pay her bills.

"It was extremely easy,' she told CBS News, adding that her financial planner told her "she was seeing more and more people" do it, "because the banks were not giving loans out traditionally to small businesses anymore."

"It's not right for everyone," Jones noted, " but it is your money, you can borrow from it tax-free, you do pay yourself back at interest, but a very low interest, much lower than maybe a traditional bank."

Just like Wall Street sellside research, delusions are rampant:

"What I feel optimistic about," Jones says, "is that I will be able to grow this business to not only pay myself back at the current interest, but continue to contribute more toward the 401K than I would have if I would have stayed where I was."

And for those wondering why doing a 401(k) raid is the worst possible idea:

"It's a big, big problem," she remarked to co-anchor Chris Wragge, "and it's one that's really been under the radar. And the big problem is that, if you lose your job, you have to pay that loan back within 60 days. So suddenly, you have no income, you owe all this money back, and the fact is that most people are unable to pay it back.

"There was a survey recently that found that 70 percent of people who lose their jobs are unable to pay back the loan and go into default. And the number is even higher ... for young people -- it's closer to 80 percent."

It gets worse: "If you go into default," Lipman pointed out, "you've just raided as a piggybank your 401(k), you don't have retirement funds and you owe taxes and penalties."

Step aside HELOCs, here comes the pension money for iPad exchange:

Still says Lipman, "There are certain times when it makes sense. If you're secure in your job, if there is a one-time expense -- let's say you need money for a down payment on a home, that's fine. You know, that makes sense. Or for education, for medical expenses. You know, that can make a lot of sense. Because you are paying yourself back. And if you can stay on track, you're fine with that.

"But the problem is, when you use it as a piggybank. When people are using this to pay for a vacation, to pay for a home that's perhaps larger than they can afford - that's where we really get into trouble."

Luckily, Americans have demonstrated beyond a reasonable doubt that when it comes to abusing rainy day capital to satisfy trivial material needs, there is nothing to worry about. Nothing at all.

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camaro68ss's picture

is this going to be like when people took equity out of there houses in 08. can you forclose on a 401k after the next crash. lol

CrazyCooter's picture

401k's are "poor mans leverage" ... I did take out a loan last fall (max of 50%) ... and bought silver.

True story.

Another guy at work was planning to do the same thing, however I changed jobs in Jan to GTFO of a major metro area, so not sure if he followed through.

WTF difference does it make? Does anyone in these forums genuinely think that in 20 years or 30 years that the "401k dollars" will be worth a piss?

The logic here is "part of something is better than all of nothing" and nothing is what it will be worth come retirement.

Regards,

Cooter

Prometheus418's picture

Yep.  Though in my case, I took the loan and used it for seed capital for a stockpile of food.  With three gradeschoolers to feed, it seemed more important than silver.

Then reduced the contribution rate to 0%, and have been using that money to buy silver instead.  Tried to close it out entirely, but they won't allow it.

Also bought a mini silver-mine.  Don't know if it will work, but I bought and am supplying the town parks with pop machines- decent return for a low investment, and there's always an outside chance that someone will unknowingly drop a few silver coins in.  

Thomas's picture

They have credit cards that link to retirement accounts to use them as lines of credit. I sent that off to a big-gun at Bloomberg and he said, "There is a special place in hell for whoever came up with that." Same email went out to Elizabeth Warren: She was simply "breathless".

Michael's picture

The 401K program was designed to relieve old school corporations from giving their employees fully paid pension benefits.

It worked like a charm.

Nels's picture

Actually, it did work like a charm (without your sarcasm).  My 401K is going to provide more than my pension.  The 401K match might have been less than what went into the pension, but it wasn't free for the company.  I'd have been a lot happier if I could have had the pension contributions also put into the 401K.

When I retire, the company is off the hook for 401K expense, and I am free from them.  While I was working for the company, they were free to change my pension plan, and they did, to my loss.  But a buck into the 401K was a buck they no longer controlled.

uno's picture

I just took out a max loan 2 weeks ago, will buy silver sometime this year, I'm waiting for a pullback.  I'll keep maxing it out as often as possible to get physical.

jeff montanye's picture

49 to 37 is a pullback.

SYantiss's picture

I did the exact same thing...

I kept enough liquid to make payments for a year if silver tanked...

The 401K will be the first thing the government steals from... After the federal retirement accounts...

Libertarians for Prosperity's picture

Me, 2.

But instead of borrowing against my 401K (I was told there were penalties and taxes to pay), i borrowed against my house. It was free/clear, so I took out a 250K HELOC at 4.5% this past April and bought a shit-ton of silver. 

Best decision I ever made.   

Misstrial's picture

What I did after I lost my job at the end of 2008 was to convert the 401k to a T Rowe Price IRA and bought gold Eagles which I then rolled over into a TRP Roth. Symbol to hold gold coins in T Rowe Price is GC-1. Vaulted in Delaware.

Best move I ever made. Some days during the ramp-up in '09 and '10, I was making $700 a day on asset appreciation. Still have my coins.

401k plans have lousy investment choices with no physical pm funds such as Sprott.

~Misstrial

FreedomGuy's picture

I was in similar boat. I've been laid off twice in the past two years. Had to close one because of a loan and cashed out another and bought silver. Good move.

What pisses me off is the government commits identity theft and puts loans against us to save bankers and stupid financiers...keeps them wealthy but taxes the living hell out of the small guy who tries to get HIS OWN MONEY (not other peoples') out of his retirement. I really hate the penalty in particular. It reinforces we are NOT free. We cannot do anything with our own earnings without government permission or conversely, government can manage our money any way it pleases. Therefore, it is not really ours.

I talked to my HR dept. about our choice of funds and pointed out that there was not one single fund that protected against inflation and we didn't even have a cash reserve fund. I suggested that that made them liable for losses in an inflationary crash. They didn't like that but gave me some mumbo jumbo about working on that. I suggested we just get a self directed account like a Fidelity or others and be allowed to invest in anything we please.

I have decided that with so many rules and conditions, 401k's suck. Plus, I now believe taxes may well be much higher in the future.

malek's picture

Just explain to us err-on-the-side-of-safety guys looking in disbelief:

Why didn't you go full frontal and take out the 401k, pay the penalty and taxes, and have it off your back?

Badabing's picture

You can’t win with 401k’s, the money comes out of your gross pay or before taxes.

With this money, you are allowed to gamble on a limited range of investments. To keep up with inflation you need to be in high to medium risk. Money markets are safe but do not yield enough to offset inflation. Now all the “free” market has to do is pump and dump and it’s gone. Hold it until retirement and you’re in a lower tax bracket with money that has much less purchasing power. If you borrow against your 401k you pay interest on the loan and have to pay it back with MONEY AFTER TAXES that goes back into your 401k to be taxed again. Can you say double taxation? If your employer contributes it is worth it to let it accumulate until you leave your job than cash out pay the tax and penalty and buy PM’s. I did at the lows of 2009 and broke even @ $1300 oz. My wife called me a jidrool but now she has to blow me.

dark pools of soros's picture

nah as long as it goes to real items or pay off higher debt it is the best thing to do.. sure if you lose your job you have to pay it back right away but if you lose you job you can take out the whole thing and that fixes the difference...

 

I paid off high debt with mine and I am thinking of paying it off, waiting the 6 months, and then take out half the value in a loan which I think is the max.. then just buy gold and some more silver

 

 

I think I need to buy a gun's picture

i took one out to by more gold....you know they charge interest to have the loan against your own money.....i'm just sorry i can't get the rest and put it in physical.....they have u trapped i would have to quit

FaithEqualsZero's picture

Same thing on my end. Took max loans on both sides. Dumped into PM's near the trough of '08. I would close out my account but they won't let me so long as I work there. A 401K is a GovCo program. THIS is how they will steal the money. They think it is theirs already.

http://www.law.cornell.edu/uscode/26/usc_sec_26_00000401----000-.html

max2205's picture

Don't worry no one ever loses their j.o.b.

HungrySeagull's picture

Let me get this straight. Uncle Sam empties the money from retirement to fund current day to day operations while Congress dickers over the budget and debt.

The People withdraw the money from the accounts and penalties be damned because no one has the income to pay any of it at all.

And the banks, employers and other things like Unions will find themselves required to fill the gap when all these borrowers do retire. Or are retiring.

 

Oh my God indeed.

Frankie Carbone's picture

I maxed out my 401K loans and have bought gold with it. 

Smart as hell move. My returns have smoked the limited options in my 401K. 

Alcoholic Native American's picture

WTF is a 401K? Is that something they gave geezers before the McEconomy?

Id fight Gandhi's picture

Exactly... Like pensions and job security they're all lost vestiges of the past wealth USA used to have.

Remember when there used to be men on the moon and super sonic planes? Ah the good old days.

dwdollar's picture

Yep.  And I don't feel sorry for these old f******.

Libertarians for Prosperity's picture

WTF is a 401K?

Good question.

A 401k is a special sort of retirement account.  A portion of your monthly income goes into this account (tax free, at the time) and sometimes your employer will match it - to a limit.

If you have any additional questions about it, just google it.  you'll find stuff about it everywhere.

 

 

Tejano's picture

Since you ask, 401Ks - I take it they are not available to poor little McSlaves, otherwise you wouldn't have to ask - can be made to work well. Instant 25% + return (if you're makin' six figures) because contributions (up to 20k per anum) are 'before tax deductions'. If you've chosen the right employer, they'll kick in several thousand dollars a year on top of that - again "tax free". And, with the right employer, you can make 'in service withdrawals' once you've attained the age of 59.5 years (you probably won't live that long) and periodically roll those funds right over into an IRA (look it up, and while you're at it look up Happy State Bank). Of course that's after you've taken out the max loan (you 'pay' any interest to yourself) and bought bullion to bury out by the pool.  Sure, 401Ks and IRAs might be confiscated and redeemed for .gov debt, but by then... However, if your skills are such that you are a participant in what you call the "McEconomy", you won't be doing any of that. So, have a nice life on the rez.

malek's picture

Yes, and the gov't will never, NEVER raise the taxes you will have to pay when you take out your 401k money after retirement. So you are perfectly safe and should never even consider saving any retirement money outside a 401k.

/sarcasm   (for the newbies here)

vocational tainee's picture

So what, if the fed is going on like it does,the dollar is bust..

Tejano's picture

From the article you cite, "Laws like this don't defend Americans -- they infantilize them."  Infant.

Tejano's picture

From the article you cite, "Laws like this don't defend Americans -- they infantilize them."  Infant.

Conrad Murray's picture

Parents borrowing against their retirement to survive day to day, while their kids borrow against their future to do the same, in the form of student loans. Debt slaves all.

Incubus's picture

I'm waiting for the debtor's prisons to make a comeback. 

They'll have to wall off america and make it one big prison system: a perfect debt-prisoner population with no choice but to exist in debt--for life.

Fukushima Sam's picture

If you have to pay back the loan right away because you lost your job then you can just take the whole thing out instead and take the tax hit and put the remainder into gold.

dark pools of soros's picture

exactly.. since most get 100% matching who cares about the tax hit.. just play it in your favor as long as the rules still let some gaming done

Dr. Kenneth Noisewater's picture

I can't WAIT for the fedgov leechfucks to start seizing or taxing 401ks, it'll be the perfect time to take the money and run.  All the matches from my last employer have vested, I just don't have anyplace in particular to put it yet and I'm lazy.  But once I see actual legislation on the floor Imma gon' pull dat shit fuck the penalty.

HungrySeagull's picture

My spouse was vested until one evening the previous spring the administration in the executive board released a handbook stating that all 100% vested as of May 1st post midnight is reduced to 20% vested with 6 total years being required to regain 100% vest. And in addition 5000 dollars was the max payout, rollover or any disbirsement. Anything over 5K is automatic annuity starting at 62 years of age.

No one in that 2000 workforce employer had a clue until the 8 am shift when they were all handed the book. I knew at that moment we were Fucked. So we slashed earth and scorched it and cashed it out.

 

That formed the core of our Physical Silver Holdings; something we will not sell for a very long time or until a certain price target is met, whichever is first.

fbrothers's picture

That is why we need to regulate the lenders. People are stupid.

Michael Victory's picture

The lenders already made their loot.

On the backs of The Happy Borrower.

 

razorthin's picture

Yup. In my plan, the net apr is 3%, it's off the record of credit reporting reporting agencies, and if you default, it is just a distribution.  If you are in a rock and a hard place, you can declare hardship to avert the 20% federal penalty.

Dr. No's picture

Thank you! That is brilliant! As credit ratings go down and interest rates go up, seems like a great way to do a car loan or something. I have not contributed to my 401k, even with the company match, since i dont like my money in lock down. However, this seems like a real alternative.

Mitch Comestein's picture

BTW, it is a 10% penalty plus the distribution gets added to taxable income.

emsolý's picture

This is transitory at best. Imagine how much these 401k assets will have appreciated after one, two more Recovery Summers. Especially in light of the fact that debt doesn't matter.

barliman's picture

 

That 30% number seems low ... was it run through the TEPCO adjustment app?

oh well, it will go up

 

barliman

Rainman's picture

Sentenced to life in debtor's prison, the inmates will always be creative. And the warden thinks they're supposed to give a shit and pay taxes and penalties. Fuggitabout it.

Id fight Gandhi's picture

Build more prisons to hold them single moms who can't pay the mortgage or credit cards. Thatll show them to be poor and useless.

Long-John-Silver's picture

Don't forget all the college loan defaulters.

HungrySeagull's picture

We are doing ok with our loans. However we feel no duty or obligation to maintain such if the United States Defaults.