More Americans are making emergency withdrawals from their 401(k) retirement plans to cover financial emergencies as inflation remains high, according to a recent report.
Millions of households are increasingly relying on their savings and racking up credit card debt to pay for necessities.
Workers are facing stubbornly high inflation, which is rapidly eroding their purchasing power and straining household expenses.
About 15,950 workers with employer-sponsored 401(k) plans made a “hardship” withdrawal in the first quarter of 2023, according to Bank of America’s Participate Pulse Report, published on Aug. 8, which analyzed 4 million employee accounts with the bank nationwide.
Hardship withdrawals allow workers employees to tap their 401(k) for an “immediate and heavy financial need.”
Individuals who make emergency withdrawals would be forced to pay income tax for taking the money out prematurely and could be face a 10 percent early withdrawal fee, if they are under 59½ years of age.
However, the penalty can be waived if workers provide sufficient evidence that the withdrawal was being used for actual financial hardship, such as a medical expense.
401(k) Withdrawals Accelerate in the Second Quarter
The percentage of those borrowing from their workplace plan in the second quarter also increased 2.5 percent, up from 1.9 percent in the first quarter.The latest report listed an uptick in withdrawals of about 36 percent from the second quarter of 2022.
Meanwhile, average 401(k) balances increased by $7,250, or 9.6 percent since the end of last year.
While 401(k) plan withdrawals increased, employee contributions remained steady, with the average rate remaining at 6.5 percent throughout the first half of 2023, said Bank of America.
“The data from our report tells two stories—one of balance growth, optimism from younger employees and maintaining contributions, contrasted with a trend of increased plan withdrawals,” said Lorna Sabbia, head of retirement and personal wealth solutions at Bank of America.
Household Credit Card Debt Hits $1 Trillion High
The Federal Reserve announced on Aug. 8 that total credit card debt hit $1.03 trillion at the end of June, after rising $45 billion, or 4.6 percent from the first quarter.It was the highest credit debt on record, according to Fed data going back to 2003.
The rise in credit card usage and debt are concerning economists, since interest rates are high at the moment.
“One trillion dollars in credit card debt is staggering,” said Matt Schulz, chief credit analyst at LendingTree, adding, “Unfortunately, it is likely only going to keep growing from here.”
The average credit card annual percentage rate, or APR, hit a new record of 20.33 percent last week, the highest since Bankrate started recording data in 1985. The previous record was 19 percent in July 1991.
Last month, the Labor Department’s Consumer Price Index, which covers core expenses like gas, food and rent prices, rose 3 percent in June compared with the previous year.
Although inflation has dropped from from its peak of 9.1 percent in June 2022, the gauge still remains above the pre-pandemic average.
In addition, there are other signs of underlying inflationary pressures within the economy, as core prices persistently remain at twice the Fed’s 2 percent target rate.
