Category: Federal Reserve, Investing, Think Tank

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2 Responses to “Early Withdrawals from Retirement Accounts During the Great Recession”

  1. rd says:

    Setting aside the whole argument about whether or not people are saving enough, from a financial planning standpoint, there is another way to view retirement savings. For people making more than median income, there are significant up-front tax savings related to IRA and 401k contributions. Since they come off the top of AGI, the savings are at the marginal tax rate.

    So, it actually makes economic sense to try to maximize your retirement savings and then tap into them if you need to for a low-probability, low-frequency event like being laid off. There is a 10% penalty (some exceptions for 401ks over 55) but in many cases you will have more than made up for that with tax-deferred gains over the years.

    If somebody can save 10% or more a year, why would it be most efficient to save say half of that from after-tax income in a bank account where you (used to) pay taxes on the interest income from it just so that you would have a cash cushion in case you lost your job? This doesn’t eliminate the need to have some cash cushion outside retirement plans, but the retirement plans can play a major role in developing longer term emergency cushions. It is more difficult to tap into retirement savings, so it is also less likely to get blown on that 25th anniversary cruise.

    A much bigger issue is the people who simply cash out their 401ks every time they change jobs.

  2. Pantmaker says:

    I put nothing in tax deferred…take my lumps now through an llc…ordinary income tax rates will only go up from here and I figure long term capital gains will always be lower…no penalties…no gimmicks….it’s mine. As a side note, retirees’ withdrawls are going to keep a boot on the neck of this market for years to come.