Study Sees Retirement Savings Being Tapped at ‘Concerning’ Levels

A third of those surveyed have taken a loan, early withdrawal, and/or hardship withdrawal from their 401(k) or similar plan or IRA. Image: Jill Battaglia/Shutterstock.com

Retirement savers are tapping into those accounts while they are still working a “concerning” levels, says a report by the TransAmerica Center for Retirement Studies, behavior that can “can severely inhibit the long-term growth” of those accounts.

In a survey, “Thirty-three percent have taken a loan, early withdrawal, and/or hardship withdrawal from their 401(k) or similar plan or IRA, including 26% who have taken a loan and 18% who have taken an early and/or hardship withdrawal. Seventeen percent have taken a loan and paid it back in full, while 8% have taken a loan and are paying it back, and 6% have taken a loan that they were unable to pay back.”

While the study did not focus specifically on federal employees, it involved individuals with incomes between $50,000 and $200,000—a range in which the large majority of federal employees fall—and IRA and 401(k) savings programs similar to the TSP.

The TSP itself recently has been calling attention to the pattern, with a recent presentation to its governing board saying that “The number of general purpose loans taken in the first seven months of 2024 is 14% higher than the same period in 2023. Private sector plans have also seen increases in loans.”

It projected that for this year, nearly 500,000 TSP investors will take general purpose loans totaling above $7 billion—which although is only about 7 percent of the total of 7.1 million account holders, would be more than double the figures of 2019-2021, continuing an upward trend from 2022 and 2023.

The data further showed a similar growth in recent years in age-based or hardship-based in-service withdrawals—which unlike loans are not paid back into the account. The projected 2024 total of just under 500,000 withdrawals totaling some $12 billion again is about double the numbers from 2019-2021, and again continuing an upward trend from 2022 ad 2023.

While the TSP requires documentation of need for an in-service hardship withdrawal, it does not require account holders to provide an explanation for age-based withdrawals or general purpose loans.

The survey however did address that issue. It found that the most common reason for taking a loan from a 401(k)-type account is a financial emergency, cited by 28 percent. Others were paying off debt (22 percent), covering everyday expenses (21 percent), medical bills (20 percent), and unplanned major expenses (19 percent). Other reasons included to make home improvements, purchase a vehicle, pay college tuition, cover burial or funeral expenses, and more.

Regarding hardship withdrawals, it said the most common reasons included losses due to a natural disaster (17 percent), medical expenses (17 percent), home expenses (15 percent), college tuition (13 percent).

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