401k borrowing can be an expensive last resort

12:17 PM, Feb 25, 2013   |    comments
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By Chris Clackum, NBC News

The number of people participating in 401k retirement plans reached an all-time high last year.

Research from Fidelity Investments also reflects a record in average balance: nearly 76-thousand dollars.

"About 8% of their paycheck goes into their 401k. Many employers match that. So that's an additional 4%," said Kathleen Murphy, President of Fidelity Personal Investing.

But another study by online financial advice firm Hellowallet exposes a growing downside.

One in four Americans have raided their 401k to pay monthly bills.

Some, whose unemployment is measured in years, not months, say they had no other choice.

Fidelity's Kathleen Murphy says it can be expensive.

"Because in addition to taking the money out, you pay tax penalties on that withdrawn money," said Murphy.

Come April 15th, those who raided their accounts last year will find out how expensive.

Most personal finance experts say it should be done only as a last resort.

Murphy says this is all the more reason to get an early start at 401k contributions.

"The compounding effect of saving when you're in your 20's and the payoff that will have in your 60's when you're ready to retire is phenomenal!" said Murphy.

But a phenomenal challenge is getting Americans to stop early withdrawal of some 70-billion dollars from their 401ks every year.


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