Cash-strapped Americans squeezed by higher prices are tapping into their 401(k).
More cash-strapped Americans, feeling the burden of high prices and a lack of ability to save, have been tapping into their 401(k) accounts for financial emergencies, data show.
The Internal Revenue Service allows Americans going through economic hardships to withdraw some of their 401(k) retirement money early — but statistics show more people are using this service now than in previous years.
Before the pandemic, the average number of people dipping into their 401(k) Vanguard Group accounts was two percent — roughly 100,000 of the investment company’s five million clients.
This rose to 2.1 percent in 2021, which is equivalent to about 105,000 people.
But the latest figures from 2022 show that this number has jumped to 140,000 – which is 2.8 percent of the total number of people who use Vanguard’s 401(k) service.
Fiona Greig, global head of investor research and policy at Vanguard. She said the new data reveals that Americans are having to dip into the funds to relieve their financial stress.
Elsewhere, 217,661 people in the federal government’s Thrift Savings Plan took hardship distributions in 2022. This number was nearly halved, to 145,834, in 2021.
Since 2018, government changes have meant that rules have been more lenient surrounding taking money from retirement accounts, which experts believe has spurred the change.
But the cash-strapped American’s personal and financial issues are one of the main reasons that more and more people are dipping into their retirement funds.
Mass layoffs across the country in a number of sectors, lack of sufficient savings, and the US teetering on the brink of recession have caused desperate times for many.
Fiona Greig, global head of investor research and policy at Vanguard, told WSJ that the withdrawals are “evidence that some families may be feeling the pinch and drawing on their 401(k) balances to relieve that financial stress.”
‘Economic hardships’ can mean preventing foreclosure and eviction, covering medical bills, paying for funerals and college tuition, buying a primary home, and covering home repair costs.
Rob Austin, director of research at Alight Solutions LLC, said that the trends are mainly driven by people who are avoiding eviction.
Rob Austin, director of research at Alight Solutions LLC, argued that most people are dipping into their funds to avoid eviction. About 15 percent do so to pay medical bills, and 10 percent pay college tuition.
But the trend could also be caused by more lower-paid workers automatically being drawn into 401(k) accounts by their employers — where they would instead maybe opt for cash to come straight to them in the first place.
Significantly, statistics show that in December 2022, Americans saved on average 3.4 percent of their monthly income. But a year earlier in 2021, this saving figure was 7.5 percent.
However, people are only allowed to withdraw the money they need during hardships, while still paying income tax on withdrawals from traditional accounts.
If people are younger than 59 and a half years old, there’s also normally a 10 percent penalty on the withdrawal.
Last month, the White House accused Republicans of using the economy as a debt limit hostage to drive through swingeing spending cuts that would hurt ordinary Americans.
The US was due to rub up against the debt limit, with Congress now tasked with staving off a catastrophic default, which could arrive in June.
But that needs agreement on raising the debt limit from $31 trillion, something hardline Republicans say they will only agree to if it comes with spending reductions and changes to President Joe Biden’s policies.
‘They’re threatening to kill millions of jobs and 401K plans by trying to hold the debt limit hostage unless they can get cut Social Security, cut Medicare, cut Medicaid,’ said Press Secretary Karine Jean-Pierre during her regular briefing.
‘So on this last point, the president has been clear he will not allow Republicans to take the economy hostage or make working Americans pay the price for their schemes to benefit the wealthiest Americans and also special interests.’