Experts advise against taking money out of your 401(k)

Financial distress is leading Americans to pull money out of their 401(k) retirement plans at an alarming rate.
Posted at 3:17 PM, Aug 09, 2023

Retirement planning has long been an important consideration for individuals seeking financial security.

Financial advisers recommend investing in a 401(k) retirement savings plan. This provides a means for employees to contribute a portion of their earnings toward a retirement fund, often with the added benefit of employer matching.

However, recent data from Bank of America has revealed an increasing number of Americans are tapping into their 401(k) savings early due to financial distress.

Bank of America's Participant Pulse report shed light on the growing prevalence of hardship withdrawals from 401(k) accounts. During the second quarter of this year, the number of individuals resorting to hardship withdrawals surged to 15,950, marking a significant 36% increase from the same period in 2022.

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Some estimate a default on government loans could cause the S&P 500 to drop about 22%, wiping out years of earned wealth for millions of retirees.


Also, The New York Federal Reserve reported credit card debt in households has exceeded the $1 trillion mark for the first time ever. This significant increase in credit card debt has contributed to an overall household debt level of $17.06 trillion at the end of the second quarter.

Julio Rivas, an associate professor of finance and economics at Lipscomb University, thinks people may be borrowing from their savings to pay for their outstanding debts.

He knows during financial hardship, individuals may be tempted to access their retirement savings as a readily available source of funds. However, Rivas cautions against this approach.

"A lot of times you have to pay penalties. There’s a 20% penalty. Now if you’re going through hardships and can show that, there are some rules that might make it easier for you to take money," Rivas said.

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Rivas emphasizes the importance of understanding the consequences of early withdrawals. While penalties may appear to be less severe than those associated with payday loans, the decision to withdraw from a 401(k) account involves forfeiting the potential for compounding growth over time.

"I probably think that penalties are less than whatever payday loan might charge you. But remember, you’re giving up future growth," Rivas said.

He thinks people should take careful consideration of both short-term relief and long-term financial goals.

Rivas says getting a part-time job is a great option too, if you're struggling to keep up with inflation.

This story was originally published by Aaron Cantrell at Scripps News Nashville.