America’s retirement timebomb: Hardship withdrawals from pension funds have TRIPLED in the last five years – as workers grapple with higher living costs

The number of Americans driven by hard times or emergencies to make withdrawals from their retirement funds has tripled in five years.

In 2018, around 2.1 percent of households with a 401(K) withdrew money to pay for a financial hardship each year, according to a new report from Fidelity Investments.

But by the middle of 2023, that rate had more than tripled to 6.9 percent.

A hardship withdrawal is an emergency removal of funds from a retirement plan which can be made in circumstances of ‘immediate and heavy financial need,’ as defined by the Internal Revenue Service. 

That could be in the event of job loss or receiving a substantial medical bill. 

In 2018, about 2.1 percent of households with a 401(k) withdrew money to pay for a financial hardship each year

Withdrawals from retirement plans, 401(K)s or traditional IRAs, will incur a 10 percent penalty, even in the case of an emergency

With the exception of 2020, which was unique because account holders were able to make penalty-free withdrawals thanks to the CARES Act, the percentage of Americans claiming hardship has consistently risen each year.

Hardship withdrawals from retirement plans – 401(K)s or traditional IRAs – incur a 10 percent penalty. 

Because they are both costly and cause a dip to retirement savings, which many Americans think are tool small to begin with, Fidelity recommends households build up emergency funds.

‘Employees who have access to short-term savings when they need it are more financially confident, have higher financial wellness scores,’ the report said.

Crucially, emergency funds must be highly liquid and allow households quick access to cash without forcing them to explore high-interest alternatives.

In August, a report by Bank of America similarly sounded the alarm over a rise in workers taking ‘hardship withdrawals’ from their 401(K)s.  

Some 15,950 of the firm’s 401(K) plan participants took a withdrawal from their accounts in the second quarter of the year – a 36 percent increase from the same period in 2022.

Fidelity recommends households build up emergency funds so they have ready access to cash without needing to resort to high-interest credit

Another option for workers facing financial hardships is 401(K) loan. That is overseen by their plan and lets them to borrow money from their retirement savings and then pay it back over time and with interest.

Financial planner Marissa Reale told DailyMail.com: ‘Taking a loan is better than a withdrawal because at least you pay it back slowly and keep on track for retirement.

‘But before that I would recommend trying to take a credit card loan first with 0 percent APR – this is a good option if your credit is good.

‘Otherwise homeowners can always consider taking an equity loan on their home – this is an option a lot of people don’t think about.’

Home equity loans allow homeowners to borrow on their equity in their home.