Wednesday, May 7, 2014

With housing ATM shut down, Americans tapped retirements prematurely in 2011 to the tune of $57 billion

So says the story here at Bloomberg, extrapolating using the basic early withdrawal penalty rate of 10%:

It’s a small number that’s part of a much larger picture: The Internal Revenue Service collected $5.7 billion in 2011 from penalties, meaning that Americans took out about $57 billion from retirement funds before they were supposed to.

The median size of a 401(k) is $24,400 as of March 31, with people older than 55 having $65,300, according to Fidelity Investments. Those funds can disappear quickly in retirement, and the early withdrawals indicate that the coming retirement crisis could be even more acute than expected. ...

Meanwhile, the amount of home-equity loans outstanding was $704 billion in 2013, down 38 percent from the 2007 peak, according to Federal Reserve data. ...

During the 2008 campaign, President Barack Obama proposed allowing penalty-free withdrawals of up to $10,000 from retirement accounts. That idea went nowhere and wasn’t included in the 2009 economic stimulus.

In 2012, the New York State Society of Certified Public Accountants proposed a temporary waiver of the penalties while families were recovering from the recession.

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Actually the premature withdrawals could have been significantly higher than $57 billion in 2011. There are many exceptions to the 10% penalty rule, one of which is for withdrawals to pay for health insurance premia, which began jumping in the wake of the passage of ObamaCare in March 2010. Careful taxpayers withdrew exactly for that growing expense, paid no penalty and in certain circumstances also deducted the expense from income when self-employed. Since those sums escaped the 10% penalty, additional sums withdrawn probably contributed to the total penalties collected in 2011.