The number of people making “hardship” or emergency withdrawals from their 401(k) plans is soaring despite low unemployment and rising real wages, a new report from Bank of America reveals.

Withdrawals in the April-to-June second quarter leapt an astonishing 36% compared to the same three months a year earlier, the bank says, citing data from company benefit plans for which Bank of America keeps the records. Those plans cover four million participants, it says. Withdrawals had also risen 12% from the first quarter.

The number of people taking loans from their 401(k) plans also rose.

The overall figures involved are still quite small: Just 0.52% of 401(k) participants, or roughly one in 200, took withdrawals during the second quarter. The number of account holders borrowing from their 401(k) was 2.5%. But the trend is ominous for the economy and for America’s retirement savings, because it comes during an almost unprecedented boom.

The unemployment rate is currently just 3.5%, around levels typically associated with the Eisenhower or Johnson eras. There are five job openings for every three unemployed workers.

The Bank of America data confirm a trend previously identified by investment giant Vanguard, which recently revealed that hardship withdrawals among its clients “hit a new high” last year after rising 42%

And the news on 401(k) withdrawals comes as the Federal Reserve reveals that consumer credit card debts have just topped $1 trillion for the first time.

If this is happening during a boom, what will the picture look like when the U.S. next enters a recession?

Vanguard found that a third of hardship withdrawals were made to pay for medical costs, while 36% were used to avoid foreclosure or eviction.

Matt Watson, chief executive and founder of financial wellness platform Origin, says many consumers are stretched because of the surge of inflation in 2021 and 2022. 

“You’ve seen real wages underperform with respect to inflation over the last 24 months,” he says. While wages recently have begun rising faster than inflation, he thinks it may take time for consumers to repair their balance sheets.

All withdrawals from 401(k) plans are a problem, because the money is supposed to stay in the plan and compound over the long-term in order to support your retirement. Watson points out that every dollar withdrawn from a 401(k) plan today is $5 or $10 or more withdrawn from your retirement balance in the future, when you’ll need it. Money in a 401(k) plan also comes with a special protection that doesn’t apply to most other assets: Creditors can’t touch it if you get into financial difficulties or, in a worse case scenario, end up in bankruptcy.

But for those in extremis there are two ways of getting money out of your 401(k) if you need it, or feel you need it, right now. One is by taking a loan, typically to be repaid within five years. Not all plans allow loans. The maximum allowed by law is the smaller of 50% of the balance or $50,000. The other is to take a hardship withdrawal, allowed in certain circumstances if you are in financial need.

Withdrawals are taxed as income, and in most cases you have to pay a 10% penalty on top if you are under 59½. Loans are not treated as a taxable distribution so long as the money is repaid on schedule.

 “The loan is effectively a free option, because if you are able to pay it back you don’t have that 10% penalty,” says Watson. “Hardship withdrawals are truly a measure of last resort.”


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