Cash-strapped Americans pressured by higher prices are tapping into their 401(k)

More cash-strapped Americans, feeling the burden of high prices and a lack of ability to save, have been turning to their 401(k) accounts for financial emergencies, data shows.

The Internal Revenue Service allows Americans experiencing financial difficulties to withdraw some of their 401(k) retirement money early, but the numbers show that more people are using this service now than in years past.

Before the pandemic, the average number of people entering his Vanguard Group 401(k) account was 2 percent, about 100,000 of the investment company’s 5 million clients.

This increased to 2.1 percent in 2021, which is equivalent to about 105,000 people.

But the latest figures for 2022 show that this number has risen to 140,000, representing 2.8% of the total number of people using Vanguard’s 401(k) service.

Elsewhere, 217,661 people in the federal government’s Thrift Savings Plan received hardship distributions in 2022. This number nearly halved, to 145,834, in 2021.

Since 2018, changes in the government meant the rules have been more lenient about taking money from retirement accounts, which experts say has spurred change.

But the personal and financial problems of cash-strapped Americans are one of the main reasons more and more people are turning to their retirement funds.

Mass layoffs across the country in various sectors, a lack of sufficient savings, and the US on the brink of recession have caused desperate times for many.

Fiona Greig, global director of investor research and policy at Vanguard, said wsj that the withdrawals are “evidence that some families may be feeling the pinch and using their 401(k) balances to ease that financial stress.”

‘Financial hardship’ can mean avoiding foreclosure and eviction, covering medical bills, paying for funerals and college tuition, buying a primary home, and covering home repair costs.

Rob Austin, director of research at Alight Solutions LLC, argued that most people are dipping into their funds to avoid eviction. About 15 percent do it to pay medical bills and 10 percent to pay for college tuition.

But the trend could also be because their employers automatically lure more lower-wage workers into 401(k) accounts, where they might instead opt to have the cash come directly to them in the first place.

Significantly, the figures show that in December 2022, Americans saved an average of 3.4 percent of their monthly income. But a year earlier, in 2021, this savings figure was 7.5 percent.

However, people are only allowed to withdraw the money they need during the hardship, while still paying income tax on withdrawals from traditional accounts.

If people are under the age of 59½, there’s typically a 10 percent penalty on the withdrawal as well.

Last month, the White House accused Republicans of using the economy as a hostage to the debt limit to push for deep spending cuts that would hurt ordinary Americans.

The United States was due to touch the debt limit, and now Congress is tasked with avoiding a catastrophic default, which could come as soon as June.

But that needs a deal to raise the $31 trillion debt limit, something hardline Republicans say they will only agree to if it comes to spending cuts and policy changes from President Joe Biden.

“They’re threatening to kill millions of jobs and 401K plans by trying to hold the debt limit hostage unless they can cut Social Security, cut Medicare, cut Medicaid,” press secretary Karine Jean-Pierre said during her speech. regular briefing.

“So on this last point, the President has been clear: He will not allow the Republicans to hold the economy hostage or make American workers pay the price for his plans to benefit the richest Americans and special interests as well. “.