Jobless tap retirement plans to survive

SAN JOSE, Calif. - With few prospects on the horizon, some of Silicon Valley's jobless are sacrificing future retirement security for day-to-day survival.

As the recession drags on and savings are exhausted, they say they have no choice but to tap retirement plans, even though they pay stiff penalties and lock in market losses from the crash.

Pension experts advise against cashing in a 401(k) if at all possible. Income tax withholding of 20 percent along with a 10 percent penalty for early withdrawal can take a big bite out of the money.

But Breana Bartholomew, 53, an accountant, says she doesn't have much choice. She's working two part-time jobs after losing a full-time job in December 2008. Her income is only a quarter of what she made before.

Her emergency savings gone, Bartholomew said she tapped her 401(k) to pay her health insurance premiums. "I'll lose about 50 percent to taxes and penalties" and market losses, she said.

Electronics engineer Robert Sweat, 36, of San Jose said he had to cash out his 401(k) to make ends meet after losing his job with Pillar Data Systems in 2008.

"It's for your retirement, and it's a very large percentage of it that gets taxed," he said.

He said his wife is still working, but has had to borrow from her 401(k) to help pay their bills.

Hewitt Associates, an Illinois human resources consulting company that tracks 3 million 401(k) holders, recently reported the biggest increase in permanent withdrawals since it began collecting the data. Withdrawals increased from 5.9 percent to 7.1 percent. Twenty percent were hardship withdrawals to satisfy an immediate, heavy financial need.

"Loans are also increasing," said Pamela Hess, director of retirement research for Hewitt. "Maybe their spouse has been laid off, and they need to tap into it while working, so they take a loan."

"It's a tough situation for lot of people, and people don't have a lot of options," she said.

Wells Fargo also has seen an increase in hardship withdrawals. "It's certainly more than usual," said Erik Davidson, managing director of investments at Wells Fargo Private Bank. "Hardship withdrawals have been very rare for us in the past, but when you're backed up against the wall, there's no place to go. But it's very, very expensive."

The Transamerica Center for Retirement Studies in Los Angeles said that plan providers are seeing more participants cashing out their balances when they change jobs.

"Those numbers are creeping up across the board, but more typically in the smaller to medium size account balances," said center president Catherine Collinson. "At some point the tax hit is so great that it's a deterrent, but in balances even up to $50,000 to $75,000, more are cashing out than have in prior years."

Fidelity Investments, which has 13 million plan members, says it hasn't seen a big increase in withdrawals so far.

"The overall distribution rate has gone up slightly, but there's not an overwhelming surge of individuals accessing and taking out distributions," said Beth McHugh, a Fidelity vice president.

She said one plan sponsor recently told her that older workers may be borrowing from their pension funds to help younger family members who are out of work.

La Tricia Ransom, 45, of Oakland, who lost her job as a copy editor at the San Francisco Chronicle, said her severance ran out after eight months. "When that ran out, I started going through my 401(k)," which she rolled into an IRA, to make mortgage and health insurance payments, she said.

Eventually, she lost her home and now she's using the money that's left to pay bills and taxes.

People who roll a 401(k) into an IRA can take out a little bit at a time, as Ransom is doing, rather than having to withdraw the entire amount, pension experts note.

"Many people are not aware that if they roll it into an IRA, they can take partial distributions," said Collinson of the Transamerica Center. "They still have taxes and penalties but they don't have to cash it out all at once. It's a way for people to sort of stave off the impact, and maybe they will find another job before they cash out the entire balance."

(c) 2010, San Jose Mercury News (San Jose, Calif.).

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