More Americans Are Treating Their 401(k)s Like Cash Machines

livemint.com:

The 401(k) is doing double duty as both a retirement account and a source of emergency funds for more Americans. A record share of 401(k) account holders took early withdrawals from their accounts last year for financial emergencies, according to internal data from Vanguard Group. Overall, 3.6% of its plan participants did so last year, up from 2.8% in 2022 and a prepandemic average of about 2%.

Retirement plans such as the 401(k) are designed to keep Americans’ nest eggs out of reach until later in life. And values in these accounts have risen substantially, in part because of a strong stock market and programs that automatically funnel money from people’s paychecks into their 401(k) accounts. These surging balances, however, have helped make more people comfortable dipping into their accounts when needed.

Americans are dealing with conflicting financial forces. While hiring has been strong and workers’ earnings keep rising, the cost of groceries, child care and car insurance keeps climbing. More people are carrying heftier balances on their credit cards.

Pulling money out Emergency distributions hit back-to-back record highs in 2022 and 2023, according to Vanguard, which administers 401(k)-type accounts for nearly five million people and published the data ahead of an annual report scheduled for June. The Internal Revenue Service allows withdrawals for hardship-related reasons, including preventing evictions and paying medical and tuition bills. People who take them from traditional accounts must pay income tax, plus often a 10% penalty if they are younger than 59½ years old.