The economy is tough out there for many Americans, and increasingly some are turning to taking money out of their retirement funds early.

During the second quarter, Fidelity Investments reported that 2.2 percent of all 401(k) participants had made a hardship withdrawal at some point over the preceding 12 months. That’s up from 2 percent in the prior year, and was the highest level in 10 years.

At the same time, Fidelity also said that the percentage of 401(k) participants that had an outstanding loan from their account rose to a record high of 22 percent in the second quarter. The average loan amount was $8,650 at the end of the quarter.

But what about Thrift Savings Plan participants?

Tom Trabucco the director of external affairs for the Federal Retirement Thrift Investment Board and brings us up to speed.

“There are two ways [for a participant] to get access to funds. One is a loan, and one is a withdrawal. Within those, there are two types of ways to access [your money]. The loan is always the preferable way to approach this because you end up putting your funds back into your account as you repay payroll withholdings.”

While it is never an ideal situation, he says sometimes it is necessary to take money out of your retirement account before you reach retirement age. You should always remember, though, that there are both short term and long term consequences to removing funds.

“First of all, in the short run, you’re removing funds that are supposed to be for investment over your entire career to generate earnings that would help with your retirement. Those funds are gone — they can’t be put back into the account. Also, you’re subject to a tax on the amount that you take out, because these are all tax deferred contributions, as well as perhaps a 10 percent penalty tax if you’re under age 59 and a half. Finally . . . if you take out a hardship withdrawal, you cannot contribute to the TSP for the next six months.”

If you are really in dire trouble, however, you might not have any other options, which is why the withdrawals are possible, as well as the loans.

“The distinction is important. Loans are always preferable, but if someone finds themselves in a situation — usually it’s because you’re buried in debt — you don’t need another loan repayment. You don’t throw a cinder block — or a new loan payment — to a drowning man. You throw him a life preserver, and that’s where the hardship withdrawal can help out.”

Trabucco says, overall, TSP participants don’t seem to be taking out as many hardship withdrawals as many investors in the private sector. He says the TSP numbers compare very favorably with what Fidelity reports. (Check out the chart comparisons here.)

“We’re [showing] pretty much a strong and steady growth in the utilization of loans and withdrawals, but it’s not spiking as they’re talking about [at Fidelity]. In my view, just talking around here, we haven’t gone far beneath the numbers, but we have heard that there is not only an unemployment issue in the general workforce, but there’s an underemployment issue. It kind of looks like that’s what might be reflected in the numbers released by Fidelity.”

Learn about TSP hardship withdrawals here.

Get more info about TSP loans here.

Learn more about TSP loans versus withdrawals here.

Email the author of this post at dramienski@federalnewsradio.com

Copyright © 2024 Federal News Network. All rights reserved. This website is not intended for users located within the European Economic Area.