With the economy slowly working its way to a full recovery, many U.S. workers have been trying to find ways to pinch pennies and creatively use their money. However, some tactics could prove to be harmful in the future.
A recent report by HelloWallet found that one in four workers resorts to taking out 401(k) loans each year, which equals $70 billion nationally. According to Business Insider, workers contribute $175 billion per year to retirement plans on average. Essentially, they’re taking out half of that amount later.
HelloWallet’s report added that between 2004 and 2010, early withdrawals doubled from $30 billion to $60 billion.
“You might be cheating your future self,” Catherine Golladay, VP of 401(k) Participant Services at Charles Schwab, told the news source. “While paying back a 401(k) loan, many people stop saving in their 401(k) plan, which can really derail retirement savings.”
Business Insider also reported that employees under age 59-and-a-half who dip into retirement funds must generally pay back their loan quickly – usually between 30 to 90 days. If not, workers face paying income taxes on whatever they’ve taken out, along with a 10 percent early withdrawal penalty.
Golladay also said that even though individuals are borrowing from themselves, and not an outside lender, that loan must be paid back with interest. Plus, when employees withdraw 401(k) funds at retirement, the amount is taxed again.
In order to keep workers as financially stable as possible, businesses should use HR software solutions. Not only will this streamline administrative work for human resource departments, it can help firms keep employees properly educated on their options for retirement planning. When HRIS software is used, companies can keep themselves organized while taking care of their staffs.