by Stephen Reed | Accounting News, News, Newsletter, Retirement Savings
More Americans are turning to a 401(k) hardship withdrawal to cover urgent and unexpected expenses. By the end of 2024, about 5% of employees had taken a hardship withdrawal from their 401(k) accounts. That’s more than double the 2% who did so in 2018. With inflation, housing, and healthcare costs rising, Americans are having difficulty saving for emergencies, so they’re finding alternative ways to afford unexpected expenses, including hardship withdrawals from retirement funds. Is this a smart move? Here’s when a hardship withdrawal does and doesn’t make sense.
What Is a 401(k) Hardship Withdrawal?
A hardship withdrawal is money taken out of a 401(k) or traditional IRA for what the IRS deems an “immediate and heavy financial need.” You can pull funds early without incurring the usual 10% early withdrawal penalty as long as the withdrawal meets certain criteria. However, these withdrawals are still subject to standard income taxes. And unlike a 401(k) loan, it can’t be paid back.
Common hardship reasons include:
- Medical expenses
- Funeral costs
- Preventing foreclosure or eviction
- Tuition and educational fees
- Repairing damage to your home from a natural disaster
When a Hardship Withdrawal Might Be the Right Move
A hardship withdrawal can make sense if:
- You’ve exhausted all other options, such as tapping emergency savings or inquiring about payment plans for your hardship
- The expense is time-sensitive and unavoidable
- You’re facing a medical emergency, a foreclosure, or an eviction
- You won’t need to withdraw from your 401(k) again in the foreseeable future
Just be aware that a hardship withdrawal means you’re shrinking your future nest egg, possibly by tens of thousands, depending on the amount you withdraw, your age, and market returns.
When a 401(k) Hardship Withdrawal Is Probably Not Worth It
It’s best to avoid taking a hardship withdrawal for credit card debt, vacations, monthly expense catch-ups, and home upgrades (unless for disaster repairs).
Retirement savings should not be used as a financial band-aid. If you find yourself in the position of contemplating a hardship withdrawal to cover routine expenses and self-incurred debt, it’s time for a budget overhaul.
Also consider that you’re still taxed on the withdrawal, so taking out $10,000 would only mean $7,000 or $8,000 after taxes.
Alternatives to Consider
Before tapping your 401(k), here are some other options to explore:
- A personal loan or home equity loan (as long as the interest rate is reasonable)
- A 401(k) loan. This is not the same as a withdrawal. You repay the loan over time with interest.
- Contact your creditors to set up a payment plan
- Seek help from nonprofit financial counseling services
These options may provide short-term relief without resorting to something as drastic as a 401(k) hardship withdrawal.
by Amanda O'Brien | Accounting News, News, Newsletter, Retirement, Retirement Savings
A 401(k) is often thought of as a set-it-and-forget-it kind of account—set a contribution amount, bank on a company match, and let the market do its thing. But if you haven’t checked in on your plan lately, you might be missing out on some significant new features.
Thanks in part to the SECURE Act 2.0, a handful of updates are giving retirement savers more flexibility, more control, and more ways to grow their money. Whether you’re just starting out or racing toward retirement, here are some under-the-radar 401(k) features worth knowing about.
Super Catch-Up Contributions
Starting this year, if you’re between the ages of 60 and 63, you can contribute an extra $11,250 to your 401(k) beyond the standard catch-up amount ($7,500 for workers over 50). This is due to a provision in the SECURE Act 2.0, and it gives late-career workers a valuable second wind to boost their savings.
Easier Access to Hardship Withdrawals
Hardship withdrawals have always been part of the 401(k) landscape, but the SECURE Act 2.0 made the process simpler. The updated rules remove some of the documentation hurdles, and many plans now allow participants to self-certify the hardship, thereby bypassing the need for an employer to sign off on the paperwork. While no one wants to dip into their retirement funds early, if life throws you a curveball with a hefty price tag, you’ll have an easier time taking a penalty-free withdrawal.
Access to Financial Advisors
Not every 401(k) offers the same cookie-cutter investment options anymore. Some plans now include a self-directed brokerage account (SDBA), which opens the door to a broader range of investment options that you can manage on your own or with the assistance of a personal financial adviser.
For seasoned investors (or those who simply want more choice and guidance), this is a major step forward. You don’t have to go it alone, and you’re not limited to just a handful of mutual funds. However, be aware that a financial advisor’s guidance will come with a fee.
Automatic Enrollment for New Hires
One issue the SECURE Act 2.0 aims to address is boosting employees’ retirement savings. Starting this year, new 401(k) plans are required to enroll eligible employees automatically. That means if you’re starting a new job with a qualifying employer, you’ll likely be opted into the plan by default. Automatic enrollment typically begins at 3% of your salary and increases by 1% each year, up to a maximum of 10%. It will be up to the employee to opt out if they wish to do so.
This move could make a big difference for younger workers who might otherwise delay saving. Even a modest contribution early on can grow significantly over time, thanks to the power of compound interest.
Smarter Digital Tools
Gone are the days of randomly selecting investment funds. Most 401(k) providers now offer access to online dashboards and planning tools. Although the specific digital tools may vary across providers, they can help you calculate how much to save, project your retirement income, and compare investment choices. These tools are typically free, and they’ve quietly become one of the most useful (yet overlooked) features of a modern retirement plan. Much like a GPS, these digital tools can’t drive the car for you, but they’ll guide you on the most efficient route.
Annuities
In an effort to give savers a way to turn part of their retirement savings into guaranteed lifetime income, the SECURE Act includes a provision that allows 401(k) plans to offer annuities as investment options. Despite the potential benefits, annuities are still relatively uncommon in 401(k) plans. However, interest is on the rise, so watch for them to become a more common part of 401(k) retirement planning.
Take Action
401(k) plans have evolved from an add-on feature of retirement to flexible tools that can adapt to your changing financial goals. If it’s been a while since you reviewed your plan, take a few minutes to log in and see what’s available. That small step could end up making a big difference in your retirement.
