Hardship Withdrawals From Retirement Accounts Surge as Americans Battle Rising Prices

U.S. banknotes in front of displayed stock graph on Feb. 8, 2021. Dado Ruvic/Reuters

Last year, a higher proportion of Americans with 401(k) accounts carried out hardship withdrawals—emergency removal of funds from a retirement plan—as many people financially struggled under decades-high inflation rates.

“A record 2.8 percent of the 5 million people in 401(k) plans run by Vanguard tapped their retirement savings in 2022 to cope with hardships such as medical bills, eviction, or foreclosure. That is up from 2.1 percent in 2021 and a pre-pandemic average of about 2 percent. Similar trends were seen with other 401(k) plan administrators and the federal government’s Thrift Savings Plan,” Fiona Greig, global head of investor research and policy at Vanguard, said in a LinkedIn post on Feb. 3.

Among users of the Thrift Savings Plan, 217,661 people took hardship distributions last year, according to The Wall Street Journal. This is up 50 percent from 145,824 distributions in 2021.

According to financial services firm Fidelity, the share of 401(k) participants taking hardship withdrawals from their accounts rose from 1.9 percent in 2021 to 2.4 percent in 2022. This is the highest share of hardship withdrawals seen by Fidelity, with such removals usually limited to a range of 2.0—2.3 percent annually.

Hardship withdrawals are allowed only when individuals are financially distressed, Mike Shamrell, vice president of thought leadership, workplace investing, at Fidelity, said to CBS.

“They are jammed up, they are in a bind. This isn’t something that people take lightly,” he said. “Hardships aren’t meant for if your daughter gets engaged and you have to set aside money for their wedding.”

Hardship Withdrawals

According to the Internal Revenue Service, “for a distribution from a 401(k) plan to be on account of hardship, it must be made on account of an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need.”

Some expenses like certain medical expenses, educational fees, payments necessary to prevent eviction from a home or foreclosure, funeral expenses, etc., are considered “immediate and heavy.”

There are restrictions, however, on the amount of money people can take out of their 401(k) plans under hardship withdrawals. Such withdrawals can attract taxes as well as a 10 percent penalty in case the individual is younger than 59½ years old.

According to Rob Austin, director of research at Alight Solutions LLC, a 401(k) provider to about 200 large plans, roughly half of 401(k) plan participants who carry out hardship withdrawals do so to avoid eviction or foreclosure, he said to The Wall Street Journal.

Another 10 percent withdraw to pay college tuition, while 15 percent remove the funds for meeting medical expenses. In 2021, the average size of a hardship distribution was $5,500. In 2022, this jumped to $7,000.

Weighed Down by Inflation

The rise in hardship withdrawal coincides with inflation rising to record levels. In 2022, the 12-month Consumer Price Index (CPI) remained at or above 6.5 percent for every single month. With continuously elevated inflation, many Americans found it difficult to make ends meet.

A survey by LendingTree in October 2022 found that 40 percent of respondents were less able to afford their monthly bills. A Salary Finance survey that month found that 72 percent of workers admitted to being financially worse off than in 2021, with higher prices blamed to be a major reason for the situation.

Pymnts and LendingClub’s Jan. 30th survey found that around 64 percent of respondents were living paycheck to paycheck by the end of 2022, which was 9.3 million more than in 2021. This data also included people making more than $100,000 annually.

As high inflation eroded the buying power of their wages, Americans were left with little choice but to dip into their savings, including their retirement funds like 401(k)s.