Americans are still looting their retirement savings

More and more workers are looting their retirement savings.

In the second quarter, the number of people undergoing hard 401(k) withdrawals increased 12% compared to the first three months of the year and jumped 36% year-over-year, according to a new report. reconnaissance From Bank of America, which tracks about 4 million employee benefit program customers.

Borrowing from retirement savings also rose. The percentage of 401(k) participants who took out a loan from their workplace plan inventory in the second quarter was 2.5%, up from 1.9% in the first three months of the year.

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Experts worry that as people have begun to treat these accounts as savings accounts rather than retirement accounts, they may be incentivized to do more in the future because of a change in the law that may end up having the opposite effect than intended.

said Steve Parrish, associate professor and co-director of the American College of Financial Services Retirement Income Center, for Yahoo Finance. “The current increase in withdrawals and loans may be an indication of the next moves.”

A statement showing the financial statements of a 401K plan.

(Getty Creative)

“Understand the consequences”

According to the Bank of America survey, the average hard worker withdrawal from a 401(k) plan in the second quarter of the year was $5,050, on par with the average withdrawal of $5,100 in the first quarter.

The average loan per participant was $8,550. The generations with the highest percentage of outstanding loans are Generation X (22%) followed by Millennials (14.5%).

Withdrawals, of course, are worse for savers because not only is that money lost, robbing yourself of a future, but withdrawals incur some hefty taxes and penalties.

Withdrawing from your 401(k) account is usually taxed as ordinary income. Also, you’ll pay a 10% early withdrawal penalty before age 59½, unless you meet with an IRS Exceptions. These include certain medical expenses, eligible tuition payments, and up to $10,000 for first-time homebuyers. Some employer plans, too, will allow withdrawal without difficulty.

With a loan, you borrow money from your retirement savings and pay it back to yourself, usually in five years, with interest — the loan and interest payments go back into your account.

One caveat: If you leave your current job, you may have to pay off your entire loan within a short period. When you can’t pay off the loan, it’s considered in default, and you’ll owe both taxes and a 10% penalty if you’re under 59 ½.

“Yes, you can access your accounts, but you have to understand the consequences,” Parrish said.

(Fidelity Investments)

(Fidelity Investments)

Prioritizing short-term expenses over long-term savings

There are myriad reasons for withdrawing money from these accounts ranging from paying off high-interest credit card debt – credit card interest rates are near 40-year highs – to medical bills, home improvements, buying a car or house, or obviously to cover their expenses now.

“In 2023, rising costs of living and short-term financial needs are forcing participants to dip into their retirement savings,” Lisa Margeson, managing director of external affairs, retirement research, and insights at Bank of America, told Yahoo Finance.

The findings also match other recent data on retirement account raids.

A 2023 survey by the nonprofit Transamerica Center for Retirement Studies (TCRS) in collaboration with the Transamerica Institute, published in July, reported that nearly 4 in 10 (37%) workers had taken out a loan, early withdrawal, and/or Withdrawal due to hardship. From a 401(k) or similar plan or IRA. This includes 28% of Gen Z workers who took a hard pull, 24% of Millennials, 19% of Generation X, and 12% of Boomers, according to the report.

Last year, 2.8% of 401(k) plan participants had a hard withdrawal, a record high, compared to 2.1% in 2021 and 1.9% in 2018, according to Vanguard’s latest report.

“This year, more employees are prioritizing short-term expenses over long-term saving,” said Lorna Sabia, president of retirement and personal wealth solutions at Bank of America.

A young curly brunette reads her bill papers, looking tense

The immediate stress of paying the bill for long-term retirement savings (Getty Creative)

The question is: Will the drag continue once inflation cools? Maybe not.

The SECURE 2.0 Act passed at the end of 2022 created six new ways to access retirement accounts without penalty before age 59 as a way to encourage workers to contribute more by making it easier to tap those funds if needed without penalty.

However, Parrish said he “wouldn’t draw too much of a conclusion from the short-term data. It does suggest that employers may want to make sure they provide at least some education to employees about their plans.”

Kerry Hannon is a senior correspondent and columnist for Yahoo Finance. She is a workplace futurist, career and retirement strategist, and author of 14 books, including “In Control at 50+: How to Succeed in the New World of Work » and “Don’t get old till you’re rich.” Follow her on Twitter @tweet.

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