Resideo Technologies Employees: These are the Dangers of Pulling From Your 401(k)s

Recent data from Bank of America paints a vivid picture of the financial pressures faced by many Resideo Technologies employees. In an analysis of over 4 million participants in their client employee benefits programs, a noticeable increase in hardship distributions from 401(k) plans was observed in the second quarter of this year, spanning April to June.

Specifically, close to 16,000 individuals took a hardship distribution during this period, marking a 12% rise compared to the first quarter. The year-over-year comparison is even more startling, with a 36% surge compared to the second quarter of 2022. On delving deeper into the numbers, the average withdrawal amount stood slightly over $5,000 for this quarter. In comparison, figures from the first quarter indicated an average of $5,100, with the second quarter of the previous year seeing an average of $5,400.

Furthermore, Bank of America's research unveiled that an increasing number of participants opted for loans from their 401(k)s in the second quarter when juxtaposed with the first. Such financial behaviors indicate a broader trend – amid burgeoning interest rates and sustained high inflation over two years, many are exploring avenues for immediate liquidity, even if it means delving into their retirement reserves.

Lorna Sabbia, the head of retirement and personal wealth solutions at Bank of America, aptly commented on this trend, noting, “In the current climate, a discernible shift towards addressing immediate financial concerns over long-term savings is evident among employees.”

For Resideo Technologies workers unfamiliar with the mechanics of a 401(k) plan, it's an investment vehicle created to aid American workers in their retirement savings journey. The primary advantage is that eligible employees can funnel a part of their pre-tax earnings into this account, allowing for tax-free growth. Under regular conditions, withdrawals before the age of 59 ½ come with a 10% penalty, alongside the standard income tax. However, the IRS provides for 'hardship distributions' that waive off the penalty for specific “immediate and heavy” financial needs, such as unforeseen medical bills, funeral expenses, or substantial home repair costs. Yet, it's crucial to note that the withdrawn amount must not surpass the actual financial need.

A recent report by the Employee Benefit Research Institute (EBRI) has shed light on an alarming trend for those nearing retirement. Individuals between the age of 55 and 64, who are at the cusp of retirement, have an average 401(k) balance of only $171,623, as of 2020 (EBRI, 2021). While this figure may seem substantial, when converted to an annuity, it only provides a mere monthly sum. Coupled with the growing number of early withdrawals, this indicates potential vulnerabilities in retirees' financial security, emphasizing the importance of holistic retirement planning and diversifying income sources during the golden years.

The decision to capitalize on a 401(k) hardship withdrawal is not to be taken lightly. While the 10% early withdrawal penalty might be circumvented, the money withdrawn is still taxable. Additionally, this action can jeopardize the health of Resideo Technologies workers' retirement savings. Unlike a 401(k) loan, funds withdrawn under hardship cannot be replaced, though regular contributions can resume. By tapping into these funds prematurely, potential investment growth is sacrificed, possibly throwing a wrench in long-term financial planning. Consequently, financial advisors frequently suggest exploring alternative means for emergency funds before considering the withdrawal of tax-advantaged retirement savings.

In conclusion, while immediate financial exigencies are undeniable, Sabbia underscores the essentiality of retirement investment. She says, “It's of paramount importance for individuals to consistently prioritize what could be life's most significant expenditure – retirement.” In these uncertain economic times, ensuring the stability and growth of retirement funds should remain a cornerstone of financial planning.

Just like seasoned travelers preparing for a leisurely journey, many in their 60s are at a crossroads, eyeing their retirement as the ultimate destination. However, unexpected detours have arisen, akin to unforeseen expenses cropping up mid-trip. Imagine these detours as pit stops on the way, where some travelers decide to dip into their well-stocked travel funds to tackle urgent needs. Much like these travelers, individuals nearing retirement age are facing the choice of accessing their 401(k) accounts due to rising financial challenges. This phenomenon, highlighted by recent reports, reflects how these seasoned savers are navigating financial terrain riddled with inflation and high interest rates. It's a reminder that while the journey might have unexpected twists, strategic planning and alternative routes can ensure the journey's end remains secure and satisfying.