Senate does not want 401(k) funds used as personal loan

The Senate is trying to keep people from using their 401(k) money as a source of personal loans. Currently, retirement accounts can be borrowed from an unlimited number of times, which the Senate is looking to cap, and for good reason.

How retirement accounts work

Business Week states that a permanent limit on the number of times an individual can take money out of an IRA fund such as a 401(k) might become reality with a bill the Senate is looking at. Senators Herb Kohl (D-WI) and Mike Enzi (R-WY) are proposing the bill to limit withdrawals from 401(k) and other retirement funds in order to keep people from draining retirement accounts and jeopardizing their futures because of a temporary shortfall. Senator Kohl was quoted as saying that a retirement account isn’t meant for use as “a piggy bank.” The bill is called the “SEAL 401(k) Savings Act.”

Nearly a third of account holders borrow

The average loan taken from a 401(k) or similar account by the end of 2010 was $7,860. Almost 28 percent of people borrowed from it, an Aon Corp study reported. There were at least two large loans taken out before some of the people took money out of their retirement, Aon Corp explained. This was 58 percent of the individuals. According to the Aon study, about 70 percent who really take money from retirement default also. About 22.5 percent of those with 401(k) accounts at Fidelity have an outstanding loan balance when 2010 was over, USA Today reports. With these statistics we learn that people needed to take out money for emergency reasons. This was why individuals with 401(k) accounts would dip into retirement.

Problem with retirement

Several individuals are having difficulty figuring out how to one day retire. Social Security, Medicare and Medicaid are typically pillars of security for retirees because portions of their paychecks have been going toward these programs for decades. The programs are not a guarantee anymore. They have been changed quite a bit. If the Social Security Administration wants to be solvent, it would need $6.5 trillion. CNN states that this is why Social Security is beginning to become such a problem. In the next 25 years, the Social Security Trust Fund will probably be depleted, and it can’t be fixed with the current Social Security payroll taxes.

Information from

Business Week

businessweek.com/news/2011-05-18/senate-bill-would-limit-use-of-401-k-s-as-rainy-day-funds.html

USA Today

usatoday.com/money/perfi/retirement/2011-05-11-401k-retiement-accounts-up_n.htm

CNN

money.cnn.com/2011/05/18/pf/expert/expert-social-security.moneymag/?section=money_latest