As a large number of people face financial difficulties, many use their 401(k) accounts to bail themselves out of liquidity crises. Changes in this trend have begun to influence how retirement savings are used. If you have a 401(k), the changes could have a significant impact on your finances. Here are two painfully destructive 401(k) plan changes that may surprise you.
Here’s why hardship withdrawals are rising fast among more Americans
As many as ever are taking money out of their 401(k) plans because they can’t afford to keep it. In 2023, 3.6% of account users took money out because they were having trouble paying their bills. In 2024, that number rose to 4.8%.
The sharp rise in people using their retirement savings to pay for important costs is a clear sign that more and more people are having trouble paying their bills. People usually ask for help to keep their homes from going into debt, stay out of eviction, or pay their medical bills.
They are usually only used as a last option because they come with fines and taxes. Because of this, account users only made a few hardship withdrawals a year, or about 2%, before the pandemic. This huge rise shows that many Americans are having more and more cash emergencies.
New changes to the law have also made it easier to ask for withdrawals in times of difficulty. But in 2018, laws stopped making workers return a loan before they could break up because of financial problems. Along with this, automatic entry in retirement plans has made it easier for people to take out money when they need to.
Taking money early? Accept that penalties may empty your retirement funds
Before workers can get penalty-free 401(k) withdrawals, they have to wait 59 years and six months. If they have to take money out before this age because they are having a hard time, they will be charged a 10% early payout tax, unless there is an exemption. People who take money out of a traditional 401(k) plan have to pay income taxes on it, which means the amount they get after taxes is less.
The critical limitation of hardship withdrawals is that the withdrawn 401(k) funds are ineligible for reseeding into your account or an IRA. Money withdrawn from retirement accounts through hardship exits cannot be recovered, so retirement fund amounts are permanently reduced, potentially causing financial difficulties for the elderly.
A bigger percentage of employees are taking money out of hardship programs, which shows that workers are having more and more money problems. People in the US who were late on their credit cards hit their highest level in over a decade in 2024. Consumer trust dropped as prices went up and more Americans couldn’t pay their car payments.
The automated enrollment policy has generated positive results but creates unforeseen difficulties
As part of their benefits packages, businesses across the board now automatically enroll their workers in retirement plans, and the rate of people saving for retirement is slowly rising.
In 2014, only 36% of companies automatically enrolled new workers in 401(k) plans. By 2024, that number had grown to 61%. Higher rates of employee participation are encouraged by the greater growth, especially among workers with lower wages.
Automatic registration and new rules for hardship withdrawals have made it easier for workers to take money out of their retirement accounts. Early withdrawals from retirement funds may help them financially in the short term, but they will have a big negative effect on their retirement security after they leave.
There are now a lot more Americans who have to decide whether to spend their retirement funds on present expenses or save for retirement.
Trying to meet both your present financial needs and your long-term savings goals can be hard. The automatic enrollment method has made it easier for more people to join retirement plans, but it has also caused more employees to take money out of their accounts before they were supposed to.
Americans are still facing a double threat and are worried about their finances.
The growth of 401(k) savings amounts becomes significant
The current financial difficulties have resulted in some positive developments in 401(k) plans. Account balances grew by 10% in 2024, setting a new record of $148,200.
The increase in 401(k) savings was driven by thriving financial markets and employees making larger contributions to their retirement funds, as Americans continue to prioritize long-term savings.
The 2024 plan year saw the highest percentage of participants, raising their savings rate to 45%, the highest level since 2019. Economic challenges have not deterred Americans from prioritizing their retirement savings. Most participants remain committed to long-term financial planning because their hardship withdrawal rates are less than 5%.
Hardship withdrawal statistics demonstrating increased participant levels indicate that people have successfully dealt with their financial problems. Long-term financial endurance among retirement savers will determine their ability to cope with ongoing financial difficulties.
