Thinking of raiding your retirement savings to get by? You’re not alone.

Some Americans are struggling to feel comfortable with their finances, thanks in part to inflation, and they’re looking to their retirement accounts for help.  

A handful of plan providers have noticed more workers raiding their retirement savings, either as a loan or a hardship distribution. Reasons included debt repayment, emergency scenarios and large purchases. 

“People are dipping into retirement savings because they lack emergency savings,” said Catherine Collinson, chief executive officer and president of nonprofit Transamerica Institute. “There are telling findings that illustrate what people have been through over the last few years.”  

There are a few ways to take an early withdrawal from a workplace retirement account, such as a 401(k) plan. A loan allows workers to pay back the amount they took over time, whereas a hardship distribution is used for “immediate and heavy financial need,” according to the Internal Revenue Service. The latter is taxed. Early withdrawals can also come with a 10% penalty, unless the individual is 59 1/2 years old or qualifies for an exception.

Loans must be paid back to the plan, with interest, in a predetermined timely fashion, and if the worker is separated from the employer (such as through a resignation or after being fired), he or she must repay the remaining balance or face taxes and penalties. 

See: I took out a 401(k) loan but am changing jobs. What do I do now?

Mixed sentiments

Workers are worried about their finances, but they’ve continued to contribute to their retirement plans, said Tom Armstrong, head of customer analysis and insight at Voya Financial. 

“Everything is getting more expensive,” Armstrong said. But he’s noticed a juggling act among Voya’s plan participants. Three-quarters of respondents said they worry about the impact of inflation on their ability to save for the future, but more than eight in 10 people also said continuing to make contributions to a retirement plan is important. 

Younger Americans may be struggling the most

Even though Gen Z and millennials are increasing their savings rates, they have concerns about student loans and budgeting, Armstrong said. Hardship distributions did slightly tick up among Voya’s plan participants in the second quarter of 2023, but it’s something the company will monitor closely, Armstrong said.

After a government-granted hiatus, student loan borrowers will need to begin repaying their debt in October, if they haven’t already. That, coupled with the looming holiday season and other financial stresses, may put more pressure on savers, he said. 

Transamerica found the same trend in its latest report released last month. Gen Z workers are saving, but they’re also dipping into their savings, Collinson said. Almost three in 10 have taken a hardship withdrawal or early withdrawal from a retirement account, the Transamerica report found — the most of any of the four generations the organization surveyed. 

Don’t miss: Thinking about borrowing from your 401(k)? When it makes sense to take from your retirement account — and when it doesn’t

How others are faring

Vanguard found an increase in hardship withdrawals among plan participants in 2022: 2.8% versus 2.1% in 2021 and 1.7% in 2020. During the COVID-19 pandemic, Americans were given looser restrictions around withdrawing from retirement plans through the CARES Act. Instead of considering withdrawals as “hardship distributions,” they were classified as “coronavirus distributions” (of which, 5.7% of plan participants had taken one). 

Participants used their hardship distributions in 2022 for various emergencies: the most common was to prevent a foreclosure or eviction, followed by medical expenses. 

Loan usage also increased, although rates were below what they were prior to the pandemic, Vanguard found. A little more than one in 10 plan participants (12%) had a loan outstanding in 2022, with the average balance at about $10,500. 

Fidelity Investments saw the opposite — the number of plan participants with 401(k) loans declined to an “all-time low” in the first quarter of 2023, to 16.6% compared to 16.7% the quarter before and 21% five years before. 

Fears about inflation and stock market volatility
has some Americans wondering how secure their futures will be. More than six in 10 workers said inflation is an “obstacle to saving for a comfortable retirement,” up from 45% the year before, and another four in 10 said the stock market was an obstacle, up from one-third the year before, according to a recent Schwab survey. 

Also see: Read this before you take out a loan on your 401(k)

What to do

Savers should carefully consider all of their options before taking early withdrawals from retirement accounts, since doing so could lead to penalties and tax implications. Of the two, loans are a softer option, as borrowers are paying the money back to themselves (with interest) and face no other tax burdens if they repay the balance before separating from their jobs. Hardship withdrawals, on the other hand, are typically more permanent and come with immediate tax consequences. Non-hardship withdrawals could face an additional penalty.

When possible, workers of all ages should look to protect themselves with insurance, including health insurance through the workplace or marketplace, life insurance, disability insurance, home or renters insurance and auto insurance, Collinson said. These coverages could provide protection when the unexpected arises, and act as one more barrier before raiding a retirement plan. 

Emergency situations were a common reason for the withdrawals in the first place, which is why all savers should focus on building an emergency reserve. Funding an emergency account and a retirement plan “doesn’t need to be mutually exclusive,” Collinson said. “If we have learned anything, it’s have emergency savings, so that if a disaster strikes, there are funds to go to,” she said.

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