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.
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
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.
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.
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.