
According to a new study by Fidelity, Americans are increasingly turning to their 401(k)s to withdraw money in what are known as hardship withdrawals. As explained by Fidelity “Hardship withdrawals are only available to workers experiencing an “immediate and heavy” financial need as defined by the IRS. They are only allowed to withdraw funds to cover their need. While hardship withdrawals do not have to be repaid, they are subject to taxes and penalties. Hardship withdrawals are allowed for the following reasons: medical expenses (including dental), avoiding foreclosure/eviction from primary residence, funeral expenses, damage to principal residence, tuition for secondary education, purchase of primary residence or FEMA event related expenses.”
- Inflation has played a part in pressuring Americans’ finances. Fidelity explains that it’s a big concern among workers, writing:
- According to a recent Fidelity survey, 74% of respondents say that inflation is causing them stress.
- Additionally, 31% say inflation is impacting their ability to concentrate at work.
- The same survey results indicated that just over one third (37%) feel excellent or very good about their finances.
- More than half (56%) of employees say they would feel a little or completely overwhelmed if an unexpected financial challenge came up (e.g., medical issue).
In the third quarter of 2022, 1.8% of 401(k) owners used hardship withdrawals to remove money from their 401(k). In the third quarter of 2023, that number increased to 2.3%. That’s a significant increase on such a large number of 401(k) participants.
Action Line: Make sure you have a plan for retirement that includes saving til it hurts, and an allocation to emergency funds that will help you avoid dipping into retirement savings. When you want help, let’s talk.