In need of emergency cash, Americans are increasingly withdrawing from their retirement savings, according to a recent Bank of America Q2 2023 Participant Pulse Report.
Many adults in the United States are prioritizing short-term expenses over their long-term savings. Data analysis from the survey showed that the number of 401(k) participants taking hardships distribution surged 36% year-over-year, following an uptick in Q1. Additionally, the rate of people borrowing from their workplace plans increased in Q2.
“Regarding the increase in hardships, the economic environment, which has seen higher rates of inflation and cost of living, could certainly be a contributing factor,” said Lisa Margeson, Bank of America’s managing director of external affairs for retirement research and insights.
Americans Are Saddled With Debt
Burdened with record inflation and rising interest rates, Americans struggle to make ends meet. With 60% of people in the United States living paycheck to paycheck, households are turning to credit cards and retirement savings as lifelines.
In fact, credit card debt has topped $1 trillion for the first time on record, the Federal Reserve Bank of New York reported last week. The Fed data showed an increase in credit card balances by $45 billion to $1.03 trillion, while total household debt reached $17.06 trillion.
High debt levels can put people in a precarious financial situation, making it challenging to meet their financial obligations without tapping into retirement savings.
Financial Hardship
Many Americans are also facing financial hardships resulting from unexpected circumstances, like a medical emergency or job loss. In the tech sector alone, over 225,000 people were laid off in 2023, according to Layoffs.fyi.
When searching for a new mid- to senior-level opportunity, the interview process is taking longer than it did during the Great Resignation. A recent report by human capital advisory firm Josh Bersin Company and workforce solutions business AMS found that the duration for global hiring is at an “all-time high.”
Unable to secure new employment quickly, job seekers are forced to tap into their emergency savings to stay financially afloat. However, according to Bankrate, nearly one in three people have emergency savings, but not enough to cover three months of expenses. To make matters worse, 22% of U.S. adults have zero emergency savings.
The lack of sufficient emergency funds leaves individuals with little to no choice but to withdraw from their retirement savings account.
When a person is laid off, they can roll over the money from their 401(k) account to an Individual Retirement Account.
Penalties For Early Withdrawals
Some 401(k) and IRA participants may not fully understand the long-term consequences of early withdrawals from retirement accounts, including penalties and the impact on future retirement savings.
If you withdraw money from your retirement account before the age of 59 ½, the IRS usually imposes a 10% tax as an early distribution penalty. A $10,000 withdrawal will generate a $1,000 loss, in addition to the income tax you would pay on that money. After the taxes and penalty, your take-home total could be as low as $7,000 from your original $10,000 withdrawal. There are, however, exceptions where you will not incur the 10% early distribution tax penalty.
Individuals should consult with financial advisors to fully understand the implications of withdrawing from retirement accounts and explore alternative solutions to address their financial needs.
Source: Forbes
