The recent surge in hardship withdrawals from 401(k) plans, as reported by Bank of America, highlights a concerning trend in the financial behavior of American workers amidst persistent high inflation. The data indicates a 13% increase in such withdrawals compared to June and a 27% rise since the beginning of 2023, with about 18,040 workers tapping into their retirement funds in the July-September quarter.
Hardship withdrawals from 401(k) plans are typically made under conditions of "immediate and heavy financial need" and come with significant financial implications. While these withdrawals provide temporary relief, they also lead to an income tax liability and potentially a 10% early withdrawal penalty for individuals under 59½, unless the withdrawal meets certain exceptions. Additionally, funds withdrawn under hardship cannot be returned to the 401(k) or rolled over to another retirement account.
On average, Americans are withdrawing approximately $5,070, similar to the figures in the first and second quarters of the year. This trend is a clear indicator of the financial strain many are facing due to inflation. The consumer price index rose 3.7% in September year-over-year, a reduction from the 9.1% peak but still significantly above the pre-pandemic average.
The report also notes an increase in the use of health savings account contributions for current healthcare expenses, rather than future savings, another sign of financial strain. Inflation is eroding the purchasing power of the average American, forcing many to rely more on savings and credit card debt to manage daily expenses.
This pattern points to broader economic challenges, including the inability of wages and salaries to keep pace with rising costs. The persistence of inflation, combined with the need to dip into retirement savings, raises concerns about the long-term financial security of American workers. While 401(k) hardship withdrawals may provide necessary relief in the short term, they could potentially undermine retirement stability in the long run.