The average 401(k) balance for Americans fell 4% in the latest fiscal quarter as consumers continued to be hit by inflation and “hardship withdrawals” increased, according to a new study.
Fidelity Investment Found A typical 401(k) fell from $112,400 in the second quarter to $107,700 in the most recent three months ended Sept. 30, a drop of nearly $5,000.
Individual retirement account (IRA) balances declined as well, falling from $113,800 to $109,600 over the same period, according to Fidelity.
Fidelity reported that the percentage of workers who made what the IRS considers a “hardship withdrawal,” meaning they withdrew unexpectedly large payments, was 2.3%, up from 1.8% a year earlier.
These withdrawals are subject to income tax, plus an additional 10% tax if made before age 59.5 or if not used for immediate financial needs, such as medical expenses, tuition, or home improvements. may be imposed.
Eight in 10 respondents cited inflation as a reason for financial stress.
“The increased use of withdrawals and loans by people in need highlights the need to help retirement savers with emergency savings. ,” Fidelity said in the report.
According to Fidelity, the main reasons account holders made such withdrawals were to avoid eviction and pay medical bills. Fidelity analyzed more than 45 million retirement accounts in a previously reported study. CNN.
Meanwhile, withdrawals in service (expenses that do not qualify as “hardship” and require payment of taxes and penalties) also rose to 3.2% in the third quarter, up from 2.7% in the year-ago period, Fidelity reported. did.
In another sign of widespread financial stress, the percentage of account holders with loans against their 401(k) accounts also rose to 2.8% from 2.4% in Q2 2022.
Loan balances for retirement plans (capped at the lower of $50,000 or 50% of the account holder’s assets) also increased slightly, from 17.2% in the third quarter of last year to 17.6% this year.
The latest number is one percentage point higher than the all-time low of 16.6% of participants taking loans from their 401(k) (achieved in early 2022).
Borrowers typically must repay loans taken from retirement accounts within five years and make payments at least quarterly.
401(k)s and IRAs are both retirement accounts, but the former is offered by an employer and the latter is opened by an individual through a bank or broker.
Regardless of the retirement account, the account holder cannot withdraw funds until age 59.5. However, an American is not considered of retirement age until her 67th birthday.
According to Fidelity, 57% of American adults told their financial services provider that they could not afford a $1,000 emergency expense.
The growing difficulty of stashing money for a rainy day is highlighted by the latest inflation figures, which remain uncomfortably above the Federal Reserve’s 2% target. ing.
Consumer price index in October rose 3.2% year-on-year deceleration from 3.7% increase in September But it’s cold consolation for consumers still struggling with stratospheric prices for everything.
In fact, prices have soared by 18.2% compared to October 2020, when the United States was under lockdown due to the coronavirus.
Meanwhile, President Joe Biden has consistently said, [government’s] Despite recently released Treasury data showing the deficit has doubled in the past year,, From about $1 trillion to $2 trillion (yes, with a “T”).