Individuals withdrawing funds early from their retirement accounts are subject to income tax and potentially a 10% penalty if they are younger than 59½ years old. The penalty may be waived if the individual can prove that the withdrawal is for a qualified hardship, like medical expenses.
Once taken, these hardship withdrawals cannot be redeposited into their 401(k) nor transferred to another retirement account. On average, Americans are withdrawing approximately $5,070, a figure consistent with the amounts seen in the previous two quarters.
"More participants took a hardship distribution compared to last quarter and compared to this time last year," the report said. "And we saw an increase in health savings account contributions being used to pay for current health care expenses, as opposed to saving for future expenses."
The rise in employees accessing their 401(k)s for emergencies coincides with persistent high inflation, which has swiftly diminished their buying power.
Last month, the government announced that the consumer price index, which reflects the prices of a wide array of items such as fuel, food, and housing, climbed 3.7% in September from a year earlier. While this rate has dropped from a high of 9.1%, it is still higher than the average before the pandemic.
Additionally, there is evidence of ongoing inflationary trends, with core prices increasing at a rate over double the Federal Reserve's target of 2%.
Consequently, Americans are more frequently dipping into their savings and accruing credit card debt to afford essential goods and services.