Americans are withdrawing from retirement funds

As unemployment rates reach levels that haven’t been seen for decades, a larger number of Americans are reaching into their retirement savings to help make ends meet.

Bank of America recently released a survey on retirement savings, and nearly 20 percent of respondents said they had drawn from retirement accounts to help pay bills since the downturn began.

Drawing from retirement savings often has serious repercussions because the tax consequences are high in the short and long-term financial health is impacted.

"Taking a distribution from a retirement account is one of the least tax-efficient places from which to get the money," Mark Nash, co-author of Pricewaterhouse Coopers' 2009 Guide to Tax and Financial Planning, tells MarketWatch.

Those who withdraw must pay an addition 10 percent penalty if they are under the age of 59 and a half. In addition, the amount that is withdrawn is considered income, so it could also affect other benefits that an individual or household receives based on their income.

If withdrawing from retirement funds is the only option a person has, there are certain circumstances that can lessen the penalties. For example, first-time home buyers can take a one-time distribution of $10,000. This money is still considered taxable income, but even if the person who withdraws is under the minimum age, the $10,000 is not subject to the additional 10 percent penalty.

Other situations such as medical expenses that exceed a certain percentage of income or college tuition can also sometimes exempt the borrower from paying the additional 10 percent penalty.

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--Bridget O'Sullivan

Baby boomers' golden years turn into golden fears

With more people than ever depending on 401k and other retirement accounts to see them through their golden years, the recent decline in the stock market has been a major cause for concern. Over the course of the past year alone, the Dow Jones Industrial Average has lost nearly 40 percent of its value.

While the economy will most certainly recover from the slump eventually, older Americans, particularly those who are already retired, don't have as much time to wait for things to improve. Many retirees must draw from their assets on a regular basis and are now forced to work with the lower values of their assets.

Compounding the problem is the fact that home prices have also dropped significantly in conjunction with the drop in the stock market. A larger proportion of older people own their homes outright compared to the general population, so a house or other property could serve as a source of income.

Given current conditions, however, homes are more difficult to sell and sale prices are trending downward. Home equity lines of credit, which until recently were a popular way to generate cash, have also become less attractive options to many homeowners because of falling property values.

Even some investments that were once considered very conservative, such as US Treasury bonds, have also begun to yield increasingly low interest rates. Once the economy begins to improve, however, the growth will have the most positive impact upon those with the most invested in the market.

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--Bridget O'Sullivan