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: Hardship withdrawals from 401(k)s reach ‘concerning’ all-time high, Vanguard says

Amid stubbornly high inflation, a record-breaking share of Americans are turning their 401(k) accounts into emergency piggy banks, according to Vanguard.

Dissecting data from a sample of the approximately 5 million employer-sponsored 401(k) accounts that Vanguard handles, researchers said 0.5% of account holders were making hardship withdrawals in October.

That’s a “concerning” all-time high, said Vanguard, the retirement-savings and asset-management heavyweight, offering a view that stretches back to 2004.

For comparison, 0.3% of accounts had hardship withdrawals last October, and during October 2020, the share was 0.2%, Vanguard’s data showed. In October 2019, it was 0.4%, it said.

At the same time, Vanguard’s numbers show that 401(k) loans and nonhardship withdrawals are also currently rising. In October, 0.9% of 401(k) plan participants had loans and another 0.9% had nonhardship withdrawals.


Fidelity Investments is also seeing an upswing in hardship withdrawals among the more than 22 million 401(k) plan participants it serves.

Last year, 1.9% of Fidelity’s 401(k) participants took a hardship withdrawal, according to Mike Shamrell, the company’s vice president of thought leadership. From January to October 2022, the share of people taking hardship withdrawals was 2.2% — a figure that, while “still relatively flat,” is the highest rate since 2020, and inflation is one of the contributing factors, he noted.

It’s easy to surmise why more Americans are resorting to 401(k) hardship withdrawals, analysts say. Whether the economy reached has peak inflation or not, the cost of living is high. Meanwhile, savings rates are dwindling and credit-card debt is climbing.

Stock portfolios aren’t offering shelter either. The Dow Jones Industrial Average

is off more than 7% year to date, while the S&P 500

has dropped more than 17% and the tech-heavy Nasdaq Composite

has declined over 29%.

“The recent increase in households drawing on their employer-sponsored retirement accounts, however, could be a sign of some deterioration in the financial health of the U.S. consumer,” said Fiona Greig, Vanguard’s global head of investor research and policy.

Tax consequences

That could be putting it mildly. Some of the tax language, the potential tax consequences and the administrative process required to make a hardship withdrawal show how hard up a household must be to go ahead with the idea.

To take a hardship withdrawal, a 401(k) account holder needs to show their employer they have an “immediate and heavy financial need” for the money, according to the Internal Revenue Service. That can be due to expenses like medical costs, tuition and funeral expenses, the IRS said.

The amount requested has to be limited to what’s required to pay off that financial need, the tax agency notes.

There’s generally a 10% tax penalty for early withdrawals before age 59½. That fee may be waived for hardship withdrawals, but the distribution is still subject to income tax. Furthermore, a person who takes a hardship withdrawal cannot pay it back to their 401(k) and also cannot roll it into another 401(k) plan or an IRA, the tax agency noted.

The financial pressures faced by U.S. households are in sharp focus on Capitol Hill. Sens. Cory Booker, Democrat from New Jersey, and Todd Young, Republican from Indiana, are hoping for traction on a bill that would make it easy for employers to set up emergency savings accounts for workers, just as they do 401(k) accounts.

The dearth of rainy-day savings among Americans is creating a scenario where people have to turn to their retirement accounts all too often, author and personal-finance adviser Suze Orman said at an event on Tuesday with Booker and Young.

“We don’t want a situation where people, when they need money, something happens and they need money, they go to their 401(k)s, or 403(b)s or [Thrift Savings Plan] to take out a loan,” Orman said. “That will be one of the biggest mistakes they made, but yet that is where they go for emergency money.”

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