WSJ Your Money Briefing - Why the 401(k) Has Become a Rainy Day Fund

Episode Date: March 13, 2025

More Americans are breaking into their 401(k) accounts to help with financial emergencies. Wall Street Journal reporter Anne Tergesen joins host Julia Carpenter to discuss the uptick in hardship withdrawals and what you should know before taking one.  Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

This episode is sponsored by Northern Trust Wealth Management. There is more to being a successful entrepreneur than just good business practices. What is it about an entrepreneur's childhood that helped fuel their entrepreneurial spirit? What are entrepreneurs doing to cultivate this spirit in their own children and build a legacy beyond their business? Tune in each month to the Road to Why podcast by the Northern Trust Institute, where host Eric Schapea dives deeper with leading entrepreneurs on these topics and more. Find the road to why where you listen to your favorite podcasts. Here's your money briefing for Thursday, March 13th. I'm Julia Carpenter for The Wall Street

Journal. More 401k account holders are taking hardship withdrawals from their retirement savings to help handle financial emergencies. More and more employers are automatically enrolling their entire workforce into 401ks. You're not only getting the higher earners who can easily afford to save, you're getting a lot of people who maybe can't actually afford to save. You're getting a lot of people who maybe can't actually afford to save. We'll talk to Wall Street Journal reporter Ann Turgeson about the issues affecting this uptick in withdrawals after the break. This episode is sponsored by Northern Trust Wealth Management. There is more to being a successful entrepreneur than just good business practices.

What is it about an entrepreneur's childhood that helped fuel their entrepreneurial spirit? What are entrepreneurs doing to cultivate this spirit in their own children and build a legacy beyond their business? Tune in each month to the Road to Why podcast by the Northern Trust Institute, where host Eric Schapea dives deeper with leading entrepreneurs on these topics and more. Find the Road to Why where you listen to your favorite podcasts. Financial emergencies are causing more Americans to break into their 401k accounts. Wall Street Journal reporter Ann Turgison joins me to talk more.

Okay, Ann, it seems like Americans are facing a pretty complicated economic picture. Unemployment is low and workers' earnings are on the rise again. But at the same time, people are falling behind on credit card and auto loan payments and grocery prices remain a huge stressor for American families. How does that 401k withdrawal uptick that you've reported on figure into this picture? So the uptick that I wrote about is about hardship distributions, which are taken for reasons like preventing foreclosure, paying medical bills, paying for primary home purchases. So a variety of reasons, some of which are truly quite financially pressing, like something

like foreclosure or eviction, others of which are more discretionary. Is it easier now, Ann, to tap into this account than it has been in the past? It actually is, and that's because of Congress, which over the past several years, there have been a number of legal changes, changes to the law that Congress has enacted, that have made it easier.

One that comes to mind is natural disasters. It used to be that after hurricanes or significant natural disasters, the IRS would say, okay, people living in a region affected by such and such hurricane can actually take X amount of money from their 401k. And a couple of years ago, Congress just said, look, if it meets the definition of a federal natural disaster,

you can use that as a hardship reason. But Congress has been diligently making it easier for people to get access to this money in case of emergencies. Last year, nearly 5% of account holders took early withdrawals from their 401k accounts. That's a record high. What are the advantages and disadvantages to taking a hardship withdrawal?

Just to put it in context, the nearly 5% who took the hardship withdrawals, that's one way to get at money in your 401k. Another way is to take 401k loans. So we're only looking at the hardship withdrawals here. And with the loans, you pay yourself back over time. So it's money coming out, but you put the money back. With the hardship withdrawal, you take the money out

and that's it. You have to pay income taxes on it. If you're younger than 59 and a half, you probably have to pay a 10% penalty, not always, but generally. So there's a finality to that money coming out, and you're not pledging to repay it. So that's a real downside to the hardship withdrawals.

On the other hand, the advantage of it is that if you really are facing a financial emergency and you meet one of the definitions of a financial hardship, perhaps it's preventing foreclosure, perhaps it's paying medical bills, then you do have this pot of money to go to and that's something that I think people are availing themselves of and we see that with these numbers. I love that you brought up the example of new tires on the car because I think a lot of people

when they read this the first thing they think is well what qualifies a circumstance as a financial hardship? So the IRS sort of lists out a list of things that are permitted under financial hardships. It doesn't mean that every 401k plan is going to adhere to this list. But generally, the IRS recognizes medical expenses for you or your family or your dependents, costs

to buy or repair a primary home, tuition for you or your dependents costs to buy or repair a primary home tuition for you or your dependents, funeral expenses, preventing eviction and foreclosure. Got it. When you talk to retirement savers, Ann, how does their 401k figure into their overall savings plan? Ideally people should have an emergency savings account and that should be your first thing. When you're starting out on saving, the first step is to put whatever it is, one month, few months of your expenses into an emergency savings account, which could be some kind

of cash account. And with interest rates higher these days, you can actually get a return on that money, which is nice. So that's step one. And then after that, the idea is that you save. It's recommended up to 15% of your income combined with your employer's matching contribution into a 401k.

And that ideally should be automated. So it's not like every month you're sort of leaving it up to your own willpower and your own memory to remember to send that check. And the ideal that you just described is that they are separate and that they are for separate purposes. Yeah, 401Ks, they're regulated in a very specific way. The money goes in often pre-tax and it comes out and you pay tax on it.

And there are penalties if you take it out younger than 59 and a half and you can only take it out for certain reasons. And so it's really meant to be off limits. And so I think it is helpful to people to keep it mentally walled off. And so having a separate, whether it's a bank account or some kind of brokerage account where you maybe invest in money market funds or something that's going to give you a higher return,

but just to have those be separate. It's a lot easier to have it under your control and not to be raiding that account every time you need money. That's WSJ reporter Ann Turgeson and that's it for your money briefing. This episode was produced by Ariana Asparu with supervising producer Melanie Roy. I'm Julia Carpenter for the This episode is sponsored by Northern Trust Wealth Management. There is more to being a successful entrepreneur than just good business practices. What is it about an entrepreneur's childhood that helped fuel their entrepreneurial spirit? What are entrepreneurs doing to cultivate this spirit in their own children and build a legacy beyond their business? Tune in each month to the Road to Why podcast by the Northern Trust

Institute, where host Eric Schapea dives deeper with leading entrepreneurs on these topics and more. Find the Road to Why where you listen to your favorite podcasts.