Americans Are Pulling From Their 401(k) at Dramatic Rate

The number of Americans pulling money from their 401(k) plans has increased over the past year, according to new data released by Bank of America.

On Tuesday, Bank of America released a new report titled Q2 2023 Participant Pulse, which included data relating to 401(k) plans in the U.S. and how they are being used by Americans.

"The report also found that a growing number of 401(k) participants are initiating withdrawals from their plans. The number of participants taking hardship distributions increased 36% year-over-year," Bank of America said in a press release with the report.

The report comes amid ongoing concerns about the U.S. economy as the Federal Reserve recently announced an increase in interest rates from 5.25 percent to 5.5 percent. A recent poll from CNN also found that 51 percent of Americans still think the U.S. economy is in a downturn and could continue to get worse as time goes on.

Despite the poll's findings, U.S. President Joe Biden has continued to tout his economic success, saying in a recent tweet, "Our Investing in America agenda is working." The tweet showed a graphic that stated that under the Biden administration, there have been 13.4 million jobs gained and an unemployment rate below 4 percent.

According to Investopedia, a hardship withdrawal from a 401(k) plan is used for an "immediate and heavy financial need."

"It is an authorized withdrawal—meaning the IRS can waive penalties—but it does not relieve you of your tax responsibilities," Investopedia states.

A spokesperson for Bank of America told Newsweek on Tuesday that "Given the specific qualifying reasons for a hardship, such as to repair losses to a home, medical expenses, or to buy a principal residence, a likely contributing factor may include the current economic environment, which has seen higher rates of inflation and cost of living over the past year."

The spokesperson also noted that more individuals may be taking money from their 401(k) plans in order to purchase a home while also stating that 401(k) balances have increased by nearly 10 percent since the end of 2022.

In addition to the increasing number of Americans making withdrawals from their 401(k) plan, the report from Bank of America also found that the average 401k balance in the U.S. increased by $7,250, or 9.6 percent since the end of last year.

According to the report, as of Quarter 2, the average 401(k) contribution was $1,460, which is down from Quarter 1 ($1,880) but in line with the 2022 Quarter 2 average. The average 401(k) account balance as of June 2023 was $82,300, an increase from $75,050 at year-end in 2022.

"The data from our report tells two stories – one of balance growth, optimism from younger employees and maintaining contributions, contrasted with a trend of increased plan withdrawals," Lorna Sabbia, Head of Retirement and Personal Wealth Solutions at Bank of America, said in the press release. "This year, more employees are understandably prioritizing short-term expenses over long-term saving. However, it's critical that employees continue to invest in life's biggest expense – retirement."

Update: 8/8/23, 2:32 p.m. ET. This story has been updated to include a statement from Bank of America.