Americans Turn to 401(k) Withdrawals Amidst Rising Inflation: Bank of America Data Reveals Concerning Trend

As the specter of high inflation continues to cast its shadow over the American economy, a growing number of individuals are resorting to drastic measures to cope with financial emergencies. New data from Bank of America has shed light on an alarming trend: an increasing number of Americans are making emergency withdrawals from their 401(k) retirement plans, a move that underscores the persistent challenges posed by chronically high inflation.

Bank of America’s analysis of clients’ employee benefits programs, tracking around 4 million accounts, revealed that approximately 15,950 workers participating in employer-sponsored 401(k) plans resorted to “hardship” withdrawals during the first quarter of 2023. This marks a concerning 36% increase from the same period in 2022.

A “hardship” withdrawal allows individuals to tap into their 401(k) funds to address an immediate and substantial financial need. However, such withdrawals come with their own set of consequences. Individuals making these withdrawals are liable to pay income tax on the withdrawn amount. Additionally, they could face a steep 10% early withdrawal fee if they are below the age of 59½, unless they can provide sufficient evidence that the funds are being utilized for a qualified hardship, such as medical expenses.

Moreover, those who opt for hardship withdrawals face limitations as they cannot repay the withdrawn amount back into their 401(k) and are unable to roll the funds into another retirement savings account.

The surge in these emergency withdrawals coincides with the unrelenting surge of inflation that has eroded Americans’ purchasing power. The government’s recent report indicated that the consumer price index, encompassing various goods including essentials like gasoline, groceries, and rents, increased by 3% in June compared to the previous year. Although down from a peak of 9.1%, the index remains above the pre-pandemic average.

Adding to the concern are underlying signs of inflationary pressures within the economy, with core prices surpassing the Federal Reserve’s target of 2%. This environment has led Americans to increasingly rely on their savings and accumulate credit card debt to cover basic necessities.

Disturbingly, the Federal Reserve reported a total credit card debt of $1.03 trillion at the end of June, a staggering increase of $45 billion or 4.6% from the previous quarter. This figure, the highest on record since 2003, is further exacerbated by exorbitantly high interest rates. The average credit card annual percentage rate (APR) soared to a new record of 20.33% last week, surpassing the previous peak of 19% in July 1991, according to a Bankrate database.

Matt Schulz, Chief Credit Analyst at LendingTree, expressed concern over this mounting credit card debt, stating, “One trillion dollars in credit card debt is staggering. Unfortunately, it is likely only going to keep growing from here.”

As Americans grapple with the far-reaching implications of rising inflation and its impact on their financial well-being, the surge in 401(k) withdrawals and credit card debt serves as a stark reminder of the urgent need for effective measures to address the root causes of the economic challenges at hand.