Taking money out of your 401(k) early comes at a stiff price
BOSTON -- When times get tough, more and more Americans are tapping into their 401(k) retirement plans -- and paying a big penalty.
Sharon Marcus' new book club business is turning a chapter in her financial life. Back in 2009, she wasn't working and her husband David's sales income was plummeting.
With a second child on the way, Sharon, then 37, felt desperate and withdrew all $30,000 from her old 401(k) plan.
"We needed rent money and we needed money for bills, and I knew that I had this chunk of money," Marcus told CBS News.
Marcus' 401(k) cash-out before age 59 and a half is a form of leakage -- and it often comes at a heavy price: a tax bill on the withdrawn amount and a ten-percent penalty to boot.
"A lot of money is flowing out," said Alicia Munnell, director of the Center for Retirement Research at Boston College.
According to Munnell, the long term impact is significant.
"Our estimate is -- and it's on the low end -- is that 1.5 percent of assets flows out each year," Munnell said. "That means that at retirement, your pile is 25 percent, one quarter less than it would have been if this money not flowed out."
For people like the Marcuses, it can be tough to get back into the habit of saving. But after seven years, they're ready to start contributing to a retirement plan.
"I feel like we're in a really good place now," Marcus said. "Thank goodness that we can start putting it away and I think I'm going to go to the bank tomorrow."
There are a lot of alternatives to closing a 401(k) which don't have the same downsides. Among them are 401(k) loans, which most people pay back, loans from family, or a loan from a bank.
