June 05, 2023
More Workers Are Tapping 401(k)s Early for Help with Financial Emergencies
Across the board, many Americans don’t have enough short-term savings to cover unexpected or unplanned crises. That could explain why more people are raiding their personal retirement accounts early to pay for financial emergencies, and experts predict that the number of workers drawing on their 401(k)s before retirement may increase.
Two major retirement plan administrators, Fidelity and Vanguard, have noted increases in hardship withdrawals, which may be taken only if there is “an immediate and heavy financial need,” according to Internal Revenue Service rules. Fidelity found that 2.4% of 22 million people with retirement accounts in its system took hardship withdrawals in the final quarter of 2022, up half a percentage point from a year earlier. And an analysis by Vanguard found that 2.8% of five million people with retirement accounts that they administer made a hardship withdrawal last year, up from 2.1% in 2021.
In the first three months of this year, Bank of America found that the number of people taking hardship withdrawals jumped 33% from the same period in 2022, with workers taking out an average of $5,100 each.
Adding to the stress for people who need to gain access to their cash quickly, they often have to withdraw more money than the amount they need in order to cover federal income tax and a 10 percent early-withdrawal penalty if they don’t qualify for a waiver. Waivers can be granted for a limited number of circumstances, such as death or permanent disability.
“The trend is especially frightening because many of these workers will face serious financial trouble later due to their early withdrawals and penalties,” said Robert Roach, Jr., President of the Alliance. “There really is no substitute for defined benefit pensions, which offer financial security in retirement and give workers greater peace of mind if they need to access their savings sooner than they had expected. This is also further evidence that we need to expand Social Security.”