Record numbers of Americans were forced to dip into their 401(k) savings last year due to financial emergencies.
However, according to financial experts, dipping into your 401(k) should only be used as a final resort.
Americans Use 401(k) to Avoid Foreclosure
A report released by Vanguard, one of America’s largest retirement plan providers, reveals that a record-high number of the nation’s citizens were forced to withdraw from their 401(k) last year during financial hardship.
A staggering 40% of these people dipped into their retirement pots to avoid foreclosure on their homes.
Can Anyone Dip Into Their 401(k)?
Not everyone can begin withdrawing from their 401(k) accounts, as these are designed as a savings pot for retirement.
However, the Internal Revenue Service (IRS) does allow Americans to dip into their savings pit in times of “immediate and heavy financial need,” per The Daily Mail.
Vanguard Reveals Nearly 200,000 People Forced to Dip into 401(k) Savings
Vanguard looks after the 401(k) accounts of over five million Americans.
Their report states that 3.6% of their clients were forced to withdraw from their accounts, which amounts to over 180,000 Americans.
Second Year of Increases in a Row
The increase in hardship withdrawals has increased for the second time in two years amid a challenging period of inflation.
With increased gas prices, groceries, and everything in between, Americans have felt more financial pressure, leading them to turn to their 401(k) accounts.
Dipping into Your 401(k) Is a Bad Idea
In the wake of the Vanguard report, many financial experts have suggested dipping into 401(k) accounts can be a bad idea.
Those who dip into their 401(k) accounts during times of hardship will be forced to pay income tax on the withdrawal.
Penalty on Withdrawals for Younger Generations
According to financial experts, another important consideration is that other charges may apply during a withdrawal.
Americans who are 59½ years old or younger will be forced to pay a 10% penalty on their withdrawal.
Options Opposed to Withdrawing from 401(k)
Financial experts have suggested that Americans exhaust all other options before dipping into their 401(k) accounts.
This is because withdrawing from a retirement fund takes away the potential for the saved money to grow at a better rate over time.
Use Up All Cash Savings First
It may be tempting to dip into the 401(k) to obtain some extra cash during a particularly challenging financial period.
However, experts argue that Americans should first use whatever cash savings they have before withdrawing from their 401(k) accounts (via CNBC).
Take On a Side Hustle
Taking on a second job or starting a side hustle is another way to help increase financial stability.
According to experts, a side hustle is a great way to ensure you have extra cash to cover unforeseen emergencies when they arise.
Thinking Ahead to the Future
Planning ahead is another great way to help ensure we don’t have to dip into our 401(k) accounts during times of financial hardship.
One way to do this is by opening a high-yield savings account that can work as an emergency fund.
Avoid Dipping Into Your 401(k) Savings
So, instead of dipping into your 401(k) account during emergencies, work toward having several streams of additional income that can help when life hits the hardest.
A high-yield savings account or a side hustle can help ensure we refrain from withdrawing from our 401(k) savings and avoid the hefty fees associated with it.
