Americans are raiding their 401(k)s

The data is in! More Americans are raiding their 401(k) accounts because of financial difficulties reports CNN. The most recent report from Bank of America released last Tuesday reveals that hardship withdrawals from 401(k)s increased 36% in Q1 of this year when compared to Q2 of 2022. The data was drawn from Bank of America’s analysis of their client’s employee benefits program which includes over 4 million plan participants.

Hardship Withdrawals

Hardship withdrawals can be taken for a variety of reasons including, purchasing a home, paying for educational expenses, and medical costs,  or avoiding foreclosure or eviction to name a few.

The IRS defines a retirement plan hardship withdrawal as, a “distribution from a participant’s elective deferral account made because of an immediate and heavy financial need, and limited to the amount necessary to satisfy that financial need. The money is taxed to the participant and is not paid back to the borrower’s account.” Keep in mind that not all 401(k) plans include a hardship withdrawal provision. Even worse, these withdrawals cannot be repaid like a loan which means the plan participant has permanently reduced their account’s earning potential.

In part, hardship withdrawals are likely being fueled by inflation. As the cost of living surges consumers may opt to charge everyday expenses they once paid in cash. The New York Federal Reserve data shows that since 2019 overall household debt holdings have increased by $3 trillion while credit card debt exceeded $1 trillion for the first time!

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Owen Coyle August 21, 2023 at 5:38 am

Shannon, unless I’m missing something, I think there is some missing information. In the sub title “Facing the hard truth” After the sentence says “Another key takeaway is to” THE INFORMATION STOPS

Shannon Hicks August 21, 2023 at 5:44 am

Thank you, Owen. I’ve added the missing text to this post.

“…broach the question of how long their money will likely last. Some simple math can tell you roughly how long their current monthly distributions may last. You don’t want to give financial advice, but you also don’t want to ignore the elephant in the room. Even better, partner with financial professionals in your market who know these metrics better than anyone and who are well-versed in approaching these sensitive discussions.

There’s no denying that Americans’ retirement is in disarray. The question is when will their largest asset be considered as a potential source of much-needed cash flow?”


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