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More Americans Borrowing from 401(k)s to Get By Financially

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Summary

Bank of America's report reveals that the number of retirement plan participants taking hardship distributions has increased 36% year-over-year, and the percentage of participants borrowing from their workplace plan has grown to 2.5%. This reflects the financial strain many Americans are under due to still-high living costs. Gen Z and millennials are increasing their 401(k) contributions, but overall average quarterly contributions have dropped 23%. Withdrawing from a 401(k) may have some benefits, such as fixed loan rates and no credit score impact, but it also has several drawbacks such as reduced retirement assets, loan initiation fees, and double taxation. The SECURE 2.0 Act will also allow savers to take emergency distributions of up to $1,000 without additional tax in 2024.

Q&As

What data was released in Bank of America's 2023 Q2 "Participant Pulse" report?
The data released in Bank of America's 2023 Q2 "Participant Pulse" report tracked the retirement saving behavior of over 4 million Americans during the three months ending June 30, 2023.

How did the number of retirement plan participants taking hardship distributions change from the previous year?
The number of retirement plan participants taking hardship distributions increased 36% year-over-year to a total of 15,950 participants.

What percentage of participants borrowed from their workplace plan in Q2 2023?
The percentage of participants borrowing from their workplace plan grew to 2.5% (75K participants) in Q2, up from 1.9% (56K participants) in Q1.

What is the average quarterly contribution for Q2 2023?
The average quarterly contribution dropped 23% between quarters, from $1,880 in Q1 to $1,460 in Q2.

What are the pros and cons of taking a 401(k) loan?
Pros: You can withdraw up to $50,000 from your 401(k) at a fixed rate that can't be raised over time, as compared to variable credit card rates. 401(K) loans aren't reported to credit bureaus like Equifax and don't factor into your credit score, even if you leave your job before paying back outstanding balances. You won't be charged late fees for missing a payment. Cons: You still have to pay interest payments on any 401(k) withdrawal. You're sacrificing investment gains, ultimately reducing your retirement assets to cover current expenses. Loan initiation fees of $25 to $75, as as well as annual charges of $25 to $50, could erase the 401(k) loan advantage over a traditional loan or credit card payment. Repaying loans using after-tax dollars means you'll get double-taxed when you eventually receive retirement-age distributions. If you leave your job during the repayment period, you may be required to make a balloon payment to repay the loan in full. And if you don't pay it, the outstanding balance counts as taxable income, and you might suffer an additional 10% early withdrawal fee on the outstanding balance.

AI Comments

👍 This article provides a great overview of the pros and cons of taking a 401(k) loan and how to make the best of the situation.

👎 This article fails to address the financial consequences for those who are unable to pay back their loan within the specified time frame.

AI Discussion

Me: It's about how more and more Americans are taking money out of their 401(k)s to make ends meet. It looks at data from Bank of America and shows that the number of people taking hardship distributions increased by 36%, and the percentage of people borrowing from their 401(k)s increased to 2.5%.

Friend: That's really concerning. Taking out money from a retirement account should be a last resort.

Me: Absolutely. It's a sign of how difficult it is for many Americans to make ends meet. On the other hand, it's encouraging that more young people are increasing their 401(k) contributions, and the average account balance is up year-over-year.

Friend: Yeah, that's true. But it's still worrying to see people taking out money from their retirement funds. What are the implications of this kind of trend?

Me: Well, for starters, it means that people won't have as much money saved up for retirement, and it could be harder for them to achieve financial independence. Also, if people are taking out money from their 401(k)s to pay for living expenses, that means they're not using the money to invest in more profitable assets, which could lead to lower returns. Finally, taking out a loan from a 401(k) can have tax implications, so it's important to be aware of the possible consequences before making a decision.

Action items

Research the SECURE 2.0 Act to understand the new rules for emergency distributions from 401(k)s.
Consider the pros and cons of taking a 401(k) loan before making a decision.
Set up an emergency fund to cover unexpected expenses and avoid having to borrow from your 401(k).

Technical terms

401(k): A type of retirement savings plan that allows employees to contribute a portion of their salary to a tax-deferred account.
Hardship Distribution: A withdrawal from a 401(k) plan that is taken due to financial hardship.
Participant Pulse: A report from Bank of America that tracks the retirement saving behavior of over 4 million Americans.
Gen Z: The generation of people born between 1997 and 2012.
Millennials: The generation of people born between 1981 and 1996.
Emergency Distribution: A withdrawal from a 401(k) plan that is taken due to an emergency.