If you're in a jammy jam, pulling some cash out of your 401(k) could make sense. 🤔 As JG Wentworth says, it's your money, use it when you need it. Except it's not that easy. 🙃 There are penalties, fees, and the guilt that you're taking from your retirement money pot.💰
All that being said, Americans are tapping their retirement accounts in a bunch of different ways for a bunch of different reasons. 🤑
Here’s Five Fast Facts on the increase in 401(k) withdrawals:
- 🌅 Early Birds - According to data from retirement daddy Vanguard, a record number of 401(k) account holders took early withdrawals from their accounts last year for financial emergencies. In 2023, 3.6% of Vanguard plan participants took an early withdrawal, compared to just 2.8% in 2022. Before the pandemic, an average of 2% withdrew funds early.
- 📣 Pep Rally - Because the stock market's been rallying harder than a caffeinated high school cheerleader, many people have watched their 401(k) increase significantly in value. While that's a good thing, experts say it may also be why people feel more comfy cozy tapping their accounts for cash.
- 🏡 Hard Times - Emergency, or hardship distributions, are also on the rise. According to Vanguard, in 2023, almost 40% of plan participants who took a hardship distribution used the funds to avoid foreclosure. That's up a bit from 36% in 2022.
- 📝 ET Loan Home - Taking out a loan against your 401(k) may sometimes be cheaper than borrowing from a traditional bank. Since interest rates started to rise, so has the number of 401(k) loans. At the end of 2023, around 13% of participants had an outstanding loan, a one percent increase from 2022.
- 💸 Saver's Club - While some people are taking more cash out of their retirement accounts, others are saving more! In 2023, 43% of 401(k) participants saved more than they did in the year before. One reason for the uptick in savings is more auto-escalation programs put into place in the workplace. These programs automatically adjust employee contributions to accounts over time.
🔥Bottom line: If you take money out of your 401(k) before retirement, you'll have to pay income tax on the withdrawal. If you're under 59.5, slap another 10% penalty on that bad boy. Yes, an early withdrawal can save your rump in a rumble, but before you do anything, think it through. And stay away from the blackjack tables.
Have you ever borrowed from your 401k?
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