Hardship withdrawals from retirement accounts rose in second quarter: report | ET REALITY


More workers tapped into their retirement plans for emergencies, according to a recent BofA report. (iStock)

The number of workers tapping into their 401(k) savings to cover financial emergencies increased in the second quarter of 2023, according to a recent report.

About 15,950 employees received hardship distributions from their company-sponsored retirement accounts in the second quarter, a 12% increase from the previous quarter and a 36% increase from last year, according to the report. report Bank of America (BofA) said.

The average amount participants withdrew was approximately $5,000 in the second quarter. That’s slightly less than the average withdrawals in the first quarter ($5,100) and the second quarter a year ago ($5,400).

Additionally, 2.5% of 401(k) participants borrowed from their work plan in the second quarter, up from 1.9% the previous quarter, according to the report. The average loan per participant amounted to $8,550, similar to the average loan size in the first quarter but less than the $8,770 borrowed in the second quarter of 2021.

“This year, more employees are understandably prioritizing short-term spending over long-term savings,” Lorna Sabbia, director of personal wealth and retirement solutions at BofA, said in a statement. statement. “However, it is critical that employees continue to invest in life’s biggest expense: retirement.”

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How Americans can tap into retirement savings without penalties

Typically, workers can begin withdrawing from retirement plans at age 59½, but sometimes an emergency may mean they need to dip into their savings early. However, they may qualify for a hardship withdrawal and avoid paying the 10% early distribution tax under certain circumstances.

According to the IRS, the following situations may qualify as an immediate and heavy financial need:

  • Medical care for you, your spouse, dependents or a beneficiary
  • Costs directly related to the purchase of your primary residence (excluding mortgage payments)
  • Tuition, related educational fees, and room and board expenses for the next 12 months of postsecondary education for you, your spouse, children, dependents, or beneficiary.
  • Payments necessary to avoid eviction from your primary residence or foreclosure on that home
  • Funeral expenses for you, your spouse, children or dependents
  • Some expenses to repair damage to your habitual residence

Another option to access retirement savings without incurring the additional 10% penalty is to borrow. Some plans allow workers to take out a 401(k) loan and waive the income taxes and penalties associated with an early withdrawal.

Workers should remember that while they will not incur a 10% early distribution tax on withdrawals made under these circumstances, the withdrawal is still considered part of their taxable income.

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Americans fight to save

Inflation and rising costs are reasons workers said they need to save more to fund a comfortable retirement, according to Charles Schwab survey.

Workers said they would need to save an average of $1.8 million for retirement, compared to $1.7 million last year, according to the survey. And only 37% of workers believe it is very likely that they will achieve this goal, 10% less than last year.

Despite the less optimistic outlook, employee contributions to their 401(K) remained stable at 6.5% through the first half of 2023, according to BofA data.

“When inflation persists for an extended period, workers will inevitably feel a deeper impact on their wallets,” said Brian Bender, director of Schwab Workplace Financial Services. “While many workers are trying to cut back on spending, some costs are unavoidable and certain areas of their finances have been affected.

“Despite these challenges, saving for retirement remains a priority for workers, who have maintained their 401(k) savings rates and have largely stayed on top of their 401(k) investments throughout the year past,” Bender continued.

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