The number of workers who tapped their 401(k) savings to cover financial emergencies increased in the second quarter of 2023, according to a recent report.
Roughly 15,950 employees took hardship distributions from their company-sponsored retirement accounts in the second quarter, a 12% increase from the previous quarter and a 36% increase from last year, the report from Bank of America (BofA) said.
The average amount that participants withdrew amounted to roughly $5,000 in the second quarter. That’s a little less than the average withdrawals in the first quarter ($5,100) and the second quarter a year ago ($5,400).
Additionally, 2.5% of 401(k) participants borrowed from their workplace plan in the second quarter, up from 1.9% in the previous quarter, according to the report. The average loan per participant totaled $8,550, similar to the loan size average in the first quarter but less than the $8,770 borrowed in the second quarter of 2021.
“This year, more employees are understandably prioritizing short-term expenses over long-term saving,” Lorna Sabbia, the head of retirement and personal wealth solutions at BofA said in a statement. “However, it’s critical that employees continue to invest in life’s biggest expense – retirement.”
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How Americans can tap retirement savings without penalty
Workers can generally begin withdrawing from retirement plans at age 59 ½, but sometimes an emergency may mean they need to tap their savings early. However, they may qualify for a hardship withdrawal and avoid paying the 10% early distribution tax in certain circumstances.
According to the IRS, the following situations may qualify as an immediate and heavy financial need:
- Medical care for yourself, your spouse, dependents or a beneficiary
- Costs directly related to the purchase of your principal residence (excluding mortgage payments)
- Tuition, related educational fees and room and board expenses for the next 12 months of postsecondary education for you, your spouse, children, dependents or beneficiary
- Payments necessary to prevent eviction from your principal residence or foreclosure on the mortgage on that home
- Funeral expenses for you, your spouse, children or dependents
- Some expenses to repair damage to your primary residence
Another option to access retirement savings without incurring the additional 10% penalty is to borrow from it. Some plans allow workers to take out a 401(k) loan and forgo the income taxes and penalty associated with an early withdrawal.
Workers should remember that while they won’t incur a 10% early distribution tax on withdrawals made under these circumstances, the withdrawal is still considered part of their taxable income.
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Americans struggle to save
Inflation and rising costs are why workers said they need to save more to fund a comfortable retirement, according to a Charles Schwab survey.
Workers said they would need to save an average of $1.8 million for retirement, compared to $1.7 million last year, according to the survey. And only 37% of workers think it’s