From the U.S. Government Accountability Office, www.gao.gov Transcript for: Retirement Savings and Early Withdrawals Description: GAO explores the options available to those looking to take money out of their retirement accounts early. Related GAO Work: GAO-19-179: Retirement Savings: Additional Data and Analysis Could Provide Insight into Early Withdrawals Released: April 2019 [ Background Music ] [ Charlie Jeszeck: ] There are cases when it's necessary to take money out. For example, there's a short-term emergency -- [ Matt Oldham: ] Welcome to GAO's Watchdog Report, your source for news and information from the U.S. Government Accountability Office. I'm Matt Oldham. When it comes to retirement, plans like 401Ks and IRAs are the leading saving methods, accounting for nearly $17 trillion worth of Americans' investments. I'm with Charlie Jeszeck, an Education Workforce and Income Security director at GAO. And he's here to talk about an aspect of these plans that many are warned against pursuing. Taking money out of retirement plans before retirement. Thank you for joining me, Charlie. [ Charlie Jeszeck: ] It's good to be here. [ Matt Oldham: ] So, how big of an issue are retirement early withdrawals? [ Charlie Jeszeck: ] It's a significant issue. In 2013, and that's the most recent date for which data are available, unfortunately, there were about $69 billion in preretirement withdrawals from 401K accounts and IRAs. About $40 billion was from IRAs, $29 billion was from K plans. And this is a lot of money. $69 billion is just objectively a lot of money. [ Matt Oldham: ] I've always heard it's a bad idea to take money out of retirement accounts early, mainly because you could get stuck with some pretty heavy tax penalties. Is that what we're talking about here? [ Charlie Jeszeck: ] Well, I think that's part of it, and in general, most retirement professionals discourage early withdrawals. If it's in certain cases, you will have a tax penalty. You have to pay taxes immediately on the withdrawal and you have an additional 10 percent penalty depending on the situation. But more fundamentally, you don't have that money in your account to accumulate interest over the remainder of your career. Having said all that, there are cases when it's necessary to take money out. For example, you know, there's a short-term emergency, you know, or you know, with some of the big storms we've had, there are cases where people need to repair their homes. There could be medical expenditures or a sudden problem with your car. So, there are issues -- reasons why you might want to take the money out. Particularly for loans, loans are actually an attractive feature about 401K plans and can actually help people buy a primary residence and help them also with other types of unforeseen expenditures. [ Background Music ] [ Matt Oldham: ] It sounds like the Federal Government encourages retirement savings through the tax incentives found in plans like the 401K or the IRA. And people who can avoid taking their money out early could see greater investment growth. Charlie, did your report provide any possible strategies for easing the effects of these early withdrawals? [ Charlie Jeszeck: ] Yeah. There's a lot of things that can be done. I think a lot of it is dependent on a firm-by-firm basis or an individual basis. For example, with cash outs, rather than simply sending a check to the individual who may not roll it over and just have to pay tax on it, they can give partial distribution, partial withdrawals, or spread it out over a number of months. In a lot of cases, the individual may leave the remainder in the plan, and so that will still accumulate for their retirement. Regarding loans, a big problem with loans is if you have a loan and you separate from a company, if you can't pay the loan back immediately in full, you'll have to pay tax on that. So, creating a situation where the employee's at a new company but can continue to pay the loan back at the old company through an extended repayment plan is, again, a way to avoid unnecessary withdrawals from the system and allow the participant to replenish their savings and continue to save for retirement. [ Matt Oldham: ] Final question. What do you believe is the bottom line of this report? [ Charlie Jeszeck: ] Well, leakage is a difficult issue in many ways. On one hand, it shows sort of the trap many individuals get caught between very short-term, but incredibly and significant emergency expenditures that they need to make, versus the long-term need to save for retirement. And ideally, what we want to do is create -- increase the flexibility in the system to help individuals balance both of those two objectives. And there are some strategies out there. Increasing financial literacy; making individuals more aware of this trade-off. Giving employers the flexibility to provide alternatives to minimize the adverse effective leakage. All those things can work together to help individual participants meet both of these challenges. [ Matt Oldham: ] Charlie Jeszeck is an Education Workforce and Income Security director at GAO and he was talking about his report on retirement savings and early withdrawals. Thank you for your time, Charlie. [ Charlie Jeszeck: ] Thank you. [ Background Music ] [ Matt Oldham: ] And thank you for listening to the Watchdog Report. To hear more podcasts, subscribe to us on Apple Podcasts. [ Background Music ] [ Matt Oldham: ] For more from the congressional watchdog, the U.S. Government Accountability Office, visit us at gao.gov.