More raiding their 401(k)s

WASHINGTON — Premature withdrawals from retirement accounts have become America’s new piggy bank, cracked open in record amounts during lean times by people like Cindy Cromie, who needed the money to start a new life.

Her employer, the University of Pittsburgh Medical Center, outsourced Cromie’s medical transcription work. Cromie said that cut her income by as much as 60 percent. So, last year, at age 56, she moved 90 miles from Edinboro, Pa., into her mother’s basement. To make ends meet, Cromie pulled $2,767 from her retirement savings.

‘‘That money, it was a security that I needed,’’ she said. Still unemployed, Cromie is trying to avoid tapping what’s left of her retirement savings — $7,000 that would be subject to taxes and a 10 percent penalty if she touches it before she turns 59½.


It’s a small number that is 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.

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

‘‘They get hit with the penalty at exactly the time when they’re the most vulnerable,’’ said Reid Cramer at the New America Foundation, which tries to improve savings for lower-income families. ‘‘So it’s a real double-whammy.’’

For decades, Americans’ homes were their piggy banks. As values rose, they refinanced or took second mortgages. Since the 2008 housing collapse, that is often not an option. Taking money from a 401(k), and worrying about the consequences later, became a more attractive alternative, and a record number of Americans made early withdrawals in 2010.

Adjusted for inflation, the government collects 37 percent more money from early-withdrawal penalties than it did in 2003. 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.


In 2011, about 5.7 million tax returns, or 4 percent of US households, reported paying penalties on early withdrawals.

‘‘You have this kind of Catch-22,’’ said Karen Friedman, of the Pension Rights Center. ‘‘On the one hand, the penalty is meant to discourage people from taking the money out. At a time when millions of families are in hardship, they’re more likely to take that money out.’’

Money in tax-deferred retirement accounts can be removed without penalty after age 59½ and generally must be withdrawn starting after age 70½. Withdrawals, at any age, are added to a taxpayer’s income and taxed at regular rates. The extra 10 percent penalty for 401(k) plans applies to early withdrawals, except in cases of disability and certain medical expenses.

Those who leave jobs at or after age 55 can avoid the penalty. Withdrawals from individual retirement accounts have more exceptions to the penalty, including spending for education and first-time home-buying.