Former St. Louis Federal Reserve President James Bullard addresses concerns over rising interest rates on "Cavuto: Coast to Coast."
A growing number of Americans are making emergency withdrawals from their 401(k) retirement plans to cover a financial emergency amid chronically high inflation, according to new data from Bank of America.
About 18,040 workers taking part in employer-sponsored 401(k) plans made a "hardship" withdrawal during the three-month period from July to September 2023, according to Bank of America's analysis of clients' employee benefits programs, which tracks about 4 million accounts.
That marks an increase of about 13% from the end of June and 27% from the beginning of the year.
Hardship withdrawals allow workers to tap their 401(k) for an "immediate and heavy financial need."
CREDIT CARD DEBT RISING IN DOUBLE-EDGED SWORD FOR THE ECONOMY
A stack of retirement account statements. (iStock / iStock)
Individuals who make these types of withdrawals owe income tax on the money and could be hit with a 10% early withdrawal fee if they are under the age of 59½. However, the penalty can be waived if workers provide adequate evidence that the money is being used for a qualified hardship, such as a medical expense.
Someone who takes a hardship withdrawal also cannot pay it back to their 401(k) and can not roll that money into another retirement savings account. Americans are pulling out on average about $5,070, which is comparable to hardship withdrawals in both the second and first quarters.
"More participants took a hardship distribution compared to last quarter and compared to this time last year," the report said. "And we saw an increase in health savings account contributions being used to pay for current health care expenses, as opposed to saving for future expenses."
The increase in workers tapping their 401(k)s for emergency purposes comes as they confront stubbornly high inflation that has rapidly eroded their purchasing power.
A sticker for Mastercard, Visa and Discover credit cards displayed on a door in New York, on Oct. 17, 2023. (Photographer: Angus Mordant/Bloomberg via Getty Images / Getty Images)
A FED PAUSE LIKELY WON’T HELP STRUGGLING CONSUMERS
The government reported last month that the consumer price index, a broad measure of the price of goods, including gasoline, groceries and rents, rose 3.7% in September compared with the previous year. Although the gauge is down from a peak of 9.1%, it remains above the pre-pandemic average.
On top of that, there are other signs of underlying inflationary pressures within the economy, with core prices running at a pace more than twice the Fed's 2% target.
Americans are increasingly relying on their savings and racking up credit card debt to pay for necessities.
Mastercard credit cards (Photo Illustration by Roberto Machado Noa/LightRocket via Getty Images / Getty Images)
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The Federal Reserve is expected to report on Tuesday that total credit card debt hit a fresh record at the end of September in data dating to 2003. The rise in credit card usage and debt is particularly concerning because interest rates are astronomically high right now.
FAQs
Hardship withdrawal activity from 401(k) accounts increased in 2023, going from 2.8% of people in 2022 who initiated a hardship withdrawal to 3.6% of participants last year, according to the Vanguard Group, which tracks about 5 million accounts.
Are loans and hardship withdrawals from 401k rising? ›
Nearly 3.6% of workers participating in employer-sponsored 401(k) plans made a so-called "hardship" withdrawal in 2023, according to Vanguard, which tracks about 5 million accounts. That marks a major increase from the 2.8% rate recorded in 2022 and the pre-pandemic average of about 2%.
What is the hardship withdrawal in 2024? ›
Explore company assistance: Under the Secure 2.0 Act, as of Jan. 1, 2024, some employers will allow you to set up an emergency fund from which you can take short-term, with no penalty withdrawals. Note that this only works if you set it up before a money shortfall.
Why are 401k withdrawals on the rise? ›
Last year, "a record share of 401(k) account holders took early withdrawals from their accounts" to help cover "financial emergencies," The Wall Street Journal said in a report, citing internal data from Vanguard Group.
Is inflation killing my 401k? ›
The balance in retirement savings accounts like IRAs and 401(k)s can get hit by inflation if the money isn't invested in assets that will at least match the inflation rate. If you have a pension, it may or may not adjust for inflation but it's debatable whether the increases have been sufficient.
Is it a good idea to take a hardship withdrawal from 401k? ›
Overall, you should only take on a loan from your 401(k) if you have exhausted all other funding options because taking money out of your 401(k) means you're hindering it from the most growth over time. You'll be missing out on the power of compound interest when you take money out of your retirement account.
Is COVID still a hardship for 401k withdrawal? ›
Normally, any withdrawals from a 401(k), IRA or another retirement plan have to be approved by the plan sponsor, and they carry a hefty 10% penalty. Any COVID-related withdrawals made in 2020, though, are penalty-free. You will have to pay taxes on those funds, though the income can be spread over three tax years.
Can I still withdraw from my 401k without penalty in 2024? ›
Finally, a provision in the Secure 2.0 Act allows special emergency distributions of up to $1,000 per year beginning in 2024. You can withdraw the money penalty-free and repay it over three years.
Are hardship withdrawals denied? ›
A hardship withdrawal might be denied if your plan doesn't allow withdrawals for that reason.
How many hardship withdrawals are allowed in a year? ›
While there isn't technically a limit on the number of 401(k) hardship withdrawals you're allowed in a year, you are limited by whether you qualify and whether you have enough money in your 401(k) to cover the qualifying hardship amount.
For a growing number of Americans, retirement accounts are doing double duty as savings accounts for the future and emergency funds for the here and now. Vanguard Group says that 2023 saw early withdrawals from a record 3.6 percent of the 5 million accounts it administers, up from 2.8 percent in 2022.
Why are 401ks losing money right now? ›
401(k) losses can happen for all kinds of reasons, from short-term market fluctuations to events like a recession. Market volatility is a normal part of investing. What matters most is staying invested and maintaining a diversified portfolio.
What is the hardship withdrawal trend for 401k? ›
According to Vanguard, a record-high 3.6 percent of workers took hardship distributions from their 401ks in 2023. But it comes at a cost. If someone takes money out of their 401k before they are 59 and a half years old, they must be prepared to pay the heavy taxes and a 10 percent penalty for withdrawing early.
Can you lose your 401k if the market crashes? ›
The odds are the value of your retirement savings may decline if the market crashes. While this doesn't mean you should never invest, you should be patient with the market and make long-term decisions that can withstand time and market fluctuation.
Should I panic if my 401k is losing money? ›
Don't Panic
Investing for retirement is a long-term venture, and while the financial markets can experience significant volatility in the short term, they tend to rise in value over the long term. Even if you're nearing retirement age, rash decisions can make it more difficult for your portfolio to recover.
Are 401k loans increasing? ›
The average loan amount has also increased in recent years. In a recent survey conducted by Plan Sponsor Council of America, the average 401k loan in 2022 was $15,000, up from $10,000 to $11,000 between 2018 and 2021. As of June 2023, the average outstanding loan balance is $8,550.
What is the problem with borrowing from 401k? ›
However, you should consider a few things before taking a loan from your 401(k). If you don't repay the loan, including interest, according to the loan's terms, any unpaid amounts become a plan distribution to you. Your plan may even require you to repay the loan in full if you leave your job.
Which is better hardship withdrawal or loan? ›
Two viable options include 401(k) loans and hardship withdrawals. A 401(k) loan is generally more attainable than a hardship withdrawal, but the latter can come in handy during times of financial strife. A financial advisor could help you put a financial plan together for your retirement needs and goals.
