Hardship withdrawals from 401(k) plans surge, indicating financial distress, says Bank of America report

WASHINGTON (TND) — For many, tapping into retirement savings is considered a last resort.

But according to a newly released Bank of America report, when it comes to 401(k) plans, more Americans are taking hardship withdrawals.

Hardship withdrawals are approved for circumstances that signal, according to financial experts, financial distress and an urgent need.

Experts say, this new data shows the dollar isn’t going as far as it used to, and it’s hitting Americans’ wallets.

Bank of America just released an analysis of clients’ employee benefits programs, which has more than 4 million participants.

While 401(k) balances increased by a little more than $7,200 since the end of last year, they found the number of people taking hardship distributions during the second quarter jumped to nearly $16,000.

That’s up 36% from the second quarter of 2022.

Financial advisor & owner of Everwell Financial Danielle Lucht said, “From an efficiency perspective, your 401(k) is the worst place to take money out of in a hardship situation.”

Lucht added, “I think it’ll take 18 months to maybe 36 months to see inflation really come back down to a level where it’s more comfortable for most Americans. . . . So the concept of how much our debt is going to be costing us, is changing.

While preparing for what could be a new reality is part of it, if you’re weighing a hardship withdrawal right now, Lucht says to assess the penalties and taxes for the money you’re taking out.

She says it may make sense to consider a 401(k) loan instead.

Taking a look at overall finances, keep an eye on the interest rate on your credit card.

This comes as credit card balances reached a series high of more than $1 trillion in the second quarter of this year, according to the New York Fed’s latest report.