401K Raids---The New Home ATM

By Richard Rubin and Margaret Collins at Bloomberg News

Her employer, the University of Pittsburgh Medical Center, had outsourced Cromie’s medical transcription work. Cromie said the move cut her income by as much as 60 percent, at times leaving her with minimum-wage pay. So, last year, at age 56, she moved about 90 miles from her home in Edinboro, Pennsylvania, into her mother’s basement. To make ends meet as she moved and then quit the job, Cromie pulled out $2,767 from her retirement savings.

“We made two trips and it just got to be real expensive,” she said. “That money, it was a security that I needed.”

Still unemployed, Cromie is trying to avoid tapping what’s left of her retirement savings -- $7,000 that would be subject to taxes and a 10 percent extra penalty if she touches it in the next two to three years, before she turns 59 1/2.

It’s a small number that’s part of a much larger picture: The Internal Revenue Service collected $5.7 billion in 2011 from penalties, meaning that Americans took out about $57 billion from retirement funds before they were supposed to.....

For decades, Americans’ homes were their piggy banks. As values rose, they refinanced or took out second mortgages. Since the housing collapse of 2008, that’s often no longer an option. Taking money from a 401(k) -- and worrying about the consequences later -- became a more attractive alternative and a record number of Americans made early withdrawals in 2010.Adjusted for inflation, the government collects 37 percent more money from early-withdrawal penalties than it did in 2003. Meanwhile, the amount of home-equity loans outstanding was $704 billion in 2013, down 38 percent from the 2007 peak, according to Federal Reserve data.

“They didn’t have access to the home equity that they had in the past,” Cramer said. “And families looked around for what was left and they actually drained the value from the 401(k).” In 2011, 5.7 million tax returns, or about 4 percent of all U.S. households, reported paying penalties on early withdrawals. The government collected more than enough money from these penalties to fund the National Oceanic and Atmospheric Administration. As economic conditions deteriorate, such withdrawals spike, as they did in 1991, 2002 and 2007. The inflation-adjusted penalty collections declined 5 percent in 2011, the last year for which complete data is available.

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