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The Takeaway: Americans Borrowing–and Not Repaying–Billions from 401(k)s
Posted By Elizabeth Nolan Brown On July 17, 2012 @ 8:41 am In Bulletin Today | No Comments
What’s a worse financial plan than taking a loan from your retirement savings? Taking a loan from your retirement savings and not paying it back. Yet a growing number of Americans are doing just that, according to a new study from financial services firm Navigant Economics. Defaults on 401(k) loans totaled $37 billion in recent years.
In the 12 months ending this past May, the default rate on 401(k) loans hit 17.4 percent — down slightly from mid-2010 but nearly double the default rate before the financial crisis.
The penalties for defaulting are steep: Not only are borrowers left with depleted retirement savings, but they also incur taxes on the money they withdraw and a 10 percent penalty fee.
“Of course, participants are not deliberately defaulting,” said study co-author Robert Litan, a senior fellow at the Brookings Institution. “They only do so when they have no other options.”
Some policymakers want to limit the number or size of 401(k) loans. But while this might reduce the likelihood of default, these options fail to address the welfare of the borrower who actually defaults, the authors note.
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