- With the exception of 2020, hardship withdrawals have increased incrementally
- Account holders were able to withdraw money without penalty in 2020 thanks to CARES
The number of Americans forced to withdraw money from their retirement funds due to hard times or emergencies has tripled in five years.
In 2018, about 2.1 percent of households with a 401(K) withdrew money annually to pay for financial problems, a new study shows. report from Fidelity Investments.
But by mid-2023, that percentage had more than tripled to 6.9 percent.
A hardship withdrawal is an emergency withdrawal of funds from a retirement plan that can be made under circumstances of “immediate and severe financial need,” as defined by the Internal Revenue Service.
This could be in the event of job loss or receiving a significant medical bill.
In 2018, about 2.1 percent of households with a 401(k) withdrew money each year to pay for financial hardship
Withdrawals from retirement plans, 401(K)s or traditional IRAs, will incur a 10 percent penalty, even in the event of an emergency
With the exception of 2020, which was unique because the CARES Act allowed account holders to withdraw funds penalty-free, the percentage of Americans claiming hardship has consistently risen every year.
Hardship withdrawals from retirement plans – 401(K)s or traditional IRAs – carry a 10 percent penalty.
Because they are both expensive and cause a decline in retirement savings, which many Americans consider to be a small tool to begin with, Fidelity recommends that households build up emergency funds.
“Employees who have access to short-term savings when they need them have greater financial security and score better on financial well-being,” the report said.
Crucially, emergency funds must be highly liquid and provide households with quick access to cash, without forcing them to explore high-interest alternatives.
In August, a Bank of America report similarly sounded the alarm about a rise in the number of employees taking “hardship” withdrawals from their 401(K)s.
About 15,950 of the company’s 401(K) participants withdrew money from their accounts in the second quarter of the year – a 36 percent increase from the same period in 2022.
Fidelity recommends that households build emergency funds so they can have immediate access to cash without having to resort to high-interest loans
Another option for employees facing financial difficulties is a 401(K) loan. This is overseen by their plan and allows them to borrow money from their retirement savings and then pay it back over time and with interest.
Financial planner Marissa Reale told DailyMail.com: ‘Taking out a loan is better than taking it out because at least you pay it back slowly and stay on track for retirement.
‘But before that, I would recommend first taking out a credit card loan with an annual interest rate of 0 percent. This is a good option if your credit is good.
‘Otherwise, homeowners can always consider taking out a loan on their home. This is an option that many people don’t think about.’
Mortgage loans allow homeowners to borrow against the equity in their home.