The Rise in Retirement Account Withdrawals
Recent studies and reports reveal a significant rise in withdrawals and loans from retirement accounts like 401(k)s and Thrift Savings Plans (TSP), signaling potential risks to long-term financial security.
By the Numbers
About 33% of savers have taken loans or withdrawals from their 401(k) or IRA, with 26% borrowing and 18% tapping funds early for hardships. Only 17% managed to fully repay loans, while 6% defaulted. The trend continues in the TSP, where general-purpose loans increased by 40% in 2023, with nearly 480,000 loans outstanding by year-end, totaling around $5 billion. Changes allowing two general-purpose loans per participant may have contributed to this rise.
Driving Factors
Key reasons for loans and withdrawals from 401(k)s and TSPs include financial emergencies, debt repayment, daily expenses, and medical bills. The TSP estimates that roughly 500,000 investors will take loans totaling over $7 billion in 2024. This amount is more than double the numbers seen from 2019-2021. Additionally, a similar increase is expected in age-based and hardship in-service withdrawals, with about 500,000 withdrawals potentially adding up to $12 billion.
Implications for TSP Participants
Borrowing against TSP accounts can lead to several long-term effects. When you take a loan you reduce the principal, which in turn reduces growth from compound interest since the funds borrowed aren’t earning returns. Also keep in mind, If unpaid within 90 days of retirement, loans are considered taxable distributions, potentially increasing the amount you owe Uncle Sam.
TSP Loan Rates
When you take out a TSP loan, the interest rate is calculated using the prior month’s G Fund interest rate. For participants taking out a loan in December 2024, that would be around 4.375%. Participants should carefully weigh this cost against their TSP account’s potential earnings.
The Path Forward
As loans and withdrawals become more common, individuals must strike a balance between addressing short-term financial needs and safeguarding long-term retirement security. Reach out to an FRC® trained advisor trained advisor who can help you explore alternatives and find a solution that best fits your needs.
