Is It OK to Tap Your 401(k) for Quick Cash?
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What is the main topic discussed in this episode?
Here's your Money Briefing for Wednesday, March 13th. I'm J.R. Whelan for The Wall Street Journal. The stock market's been hitting new records over the past few months, and that's been good news for 401k account holders. Those higher balances are also leading a lot of people to use their retirement account as a quick source of cash.
Prices for key things like childcare, groceries, continue to rise at levels that people find painful. People are taking on more credit card debt. So some of these people are turning around and finding, look at that, I actually have some savings, yet I need some cash.
But is it a good idea? We'll talk to Wall Street Journal reporter Ann Tergesen after the break.
Why are more Americans treating their 401(k) like a source of quick cash?
More people are taking early withdrawals from their 401k accounts. Wall Street Journal retirement reporter Anne Turgason joins me. Anne, how are people's 401ks doing in general right now?
In general, they're actually doing pretty well. The average account balance is up about 19% in 2023, and savings rates by many measures are rising. So overall, people with 401ks are generally in good shape if you look at the averages. There are some metrics by which that story is not true. For example, you alluded to rising rates of early withdrawals from 401ks for emergency purposes. And it is true that such withdrawals, which are referred to as hardship withdrawals in the industry, that those reached a record 3.6% of participants at Vanguard 401k plans in 2023. So 3.6% is a pretty small percentage. However, that is a record level, and it's up from 2.8% in 2022.
The labor market is strong, and we've seen employee wages trend higher. So why aren't people taking early withdrawals from their 401ks?
It's hard to know for sure, you know, what motivates individual people. However, we're seeing trends that indicate the economy is faring well. For example, like you said, the labor market is strong. We're seeing real wages after inflation rise for a lot of workers. However, we're also seeing, you know, some negatives. For example, inflation is still trending above the 2% that the Fed wants to see. So therefore, prices for key industries Things like child care, some groceries have continued to rise at levels that people find painful. Credit card debt reflects that. People are taking on more credit card debt. So you're seeing sort of a divergence there. And I think the 401k data also reflects a divergence.
A lot of people are doing very well. Those who can afford to save are really saving. They're amassing larger and larger balances. You know, the market has done well over the past year. However, there also are a lot of people who maybe aren't doing as well and who feel the need to rely on their 401k savings in an emergency. Another factor I should mention is automatic enrollment in 401k plans. That's become... much more the norm than it was, you know, even five or 10 years ago. And as more people are automatically enrolled in 401k accounts, you have more people amassing savings than would have been the case if they had to enroll voluntarily on their own. A lot of people who are automatically enrolled would not have done so on their own.
So some of these people are turning around and finding, look at that, I actually have some savings, yet I need some cash.
For people who do need to take an early withdrawal, do they need to have a documented reason for doing that?
Under the hardship rule provisions, you do need to have specified reasons. For example, preventing foreclosure or eviction is a big one. You can use hardship withdrawals to pay tuition bills. You can use it to pay medical bills. There's a host of reasons that are officially recognized by the IRS. However, the rules have changed. Plans don't have to accept the IRS rules. They can vary by plan.
Now, just to be sure, if somebody does make an early withdrawal, do they have to pay that money back?
No. If you take a hardship withdrawal, you're taking that money out. If it's a traditional 401k account, you're paying income tax on the money you withdraw. If you're younger than 59 and a half, you're also probably paying a 10% penalty on your withdrawal.
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Chapters
4 chapters
1
What is the main topic discussed in this episode?
0:03–1:00
2
Why are more Americans treating their 401(k) like a source of quick cash?
1:00–5:19
3
How have 401(k) balances and savings rates changed recently?
5:19–7:08
4
What factors are driving a rise in early withdrawals and hardship distributions?
7:08–8:59
Speakers
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