When an emergency strikes, many Americans plan to raid their retirement savings.

“Savings rates go down and hardship withdrawals and loans go up,” Tom Armstrong, vice president of customer analytics and insight and head of Voya’s Behavioral Finance Institute for Innovation.

That is the takeaway from a recent private Voya survey of 1,005 Americans. 43% said they considered their retirement funds as their only form of emergency savings.

The results underscore the ongoing need to help more Americans prepare for an unexpected event that requires a quick influx of cash.

It is not uncommon for folks to dip into their retirement account. Almost 2 in 5 have in the past, according to a survey conducted in 2021 by TransAmerica Center for Retirement Studies, including 29% who have taken out a loan and 27% who have taken an early and/or hardship withdrawal.

Some 401(k)s allow workers to take a hardship distribution to pay for emergencies like medical expenses. Depending on the reason for the withdrawal, some workers may have to pay a 10% tax if they’re younger than 59 ½. A 401(k) loan, on the other hand, must be repaid to the employee’s account plus interest on a set repayment schedule. If the loan is not paid back on schedule, it may be considered a distribution, subject to tax and penalties.

“According to our own retirement plan participant data at Voya, employees without adequate emergency savings are 13 times more likely to take a hardship withdrawal from their retirement plan,” Armstrong said.

People have short-term needs, but there are still long-term ramifications of early hardship withdrawals. Not only do workers have less savings overall for their long-term security, there is also the accompanying taxes on the withdrawal that must be paid off within three years.

Armstrong said many workers could turn to other resources for their emergencies, rather than their retirement savings. Many employers are stepping in to provide these options.

“As individuals continue to focus on building savings and improving their overall financial wellbeing, many are seeking support from their employer. As a result, more and more employers today are offering holistic financial wellness solutions to support their employee base, inclusive of things like: [health savings accounts] to offset the burden of medical costs, student loan debt support, and tools for building emergency savings,” Armstrong said.

“The reality is, though, that we often find many individuals don’t recognize how many great resources are available to them — and many without cost — directly from their employer,” Armstrong added.

The recent passage of the SECURE 2.0 Act could also help people save for emergencies without sacrificing their retirement goals.

Starting in 2024, employers can enable workers to use a special emergency savings account as part of their retirement account. This account is capped at $2,500 and workers are allowed to take a withdrawal at least once a month. The first four withdrawals are not subject to fees. Employers can even match contributions to these accounts.

Another provision taking effect in 2024 allows workers to take one penalty-free withdrawal from their retirement account — up to $1,000 per year — for “unforeseeable or immediate financial needs” related to an emergency. The withdrawal, though, must be repaid within three years. “The good news is the passing of SECURE 2.0 has also brought support for emergency savings, which we see having a significant impact for individuals and their savings needs,” Armstrong said.

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