401(k) Hardship Withdrawals on the Rise

In the United States, a 401(k) plan is a employer-sponsored pension account that is primarily funded by employee contributions from their paychecks. In other words, employees take out a small portion of their annual income and invest that money for their retirement. Today, 401(k) plans have become a trustworthy and efficient way of saving up for retirement. But, in recent times, bank data has suggested that many Americans were tapping out of their 401(k) accounts due to financial distress.

Statistics show that almost 16,000 people made hardship withdrawals in the first quarter of 2023, which comprised of almost a 36% increase from last year. Many experts believe that these decisions made for short term satisfaction can come to haunt these employees in the long term. Now, there are many reasons for these withdrawals: rising inflation, post-pandemic consumer spending, and debt balances. More specifically, data shows that household debt has risen approximately $3 trillion since 2019 and credit card debt surpassed $1 trillion for the first time.

In reality, such hardship withdrawals were only intended for serious financial circumstances. But with the increasing number of withdrawals in recent times, many believe that the reasons for these withdrawals may not be as legitimate as they once seemed. One catalyst for this was the new Secure 2.0 retirement regulations passed by the Biden administration, which allowed employees to self-certify that they meet the hardship criteria. Before this, employees were required to show proof that their hardship withdrawal was valid.

With these withdrawals come a variety of penalties as well. People under the age of 60 need to pay 10% early penalty and the withdrawal will be taxed as normal income. But in general, the number of workers taking 401(k) loans has decreased ever since the COVID-19 pandemic. As more people are starting to rely on these loans, it is important that they become aware that these 401(k) accounts should not be viewed as a way to cover expenses. Rather, they should be looked at as a way to save for the future and ensure that every employee can sustain themselves after retirement.