In the latest sign of an economy edging deeper into troubled waters, more Americans are raiding their 401(k) retirement accounts to cover basic living costs, according to data released by Fidelity Investments on Monday. 

"Americans outside the wealthiest quintile have run out of extra savings generated early in the pandemic and now have less cash on hand than they did when the pandemic began," notes Bloomberg's Alexandre Tanzi, citing Fed data. 

According to Fidelity, 2.3% took a hardship withdrawal in the third quarter, up significantly from the 1.8% rate observed in the same quarter of 2022. The top two reasons given for the third-quarter hardship withdrawals: avoiding foreclosure/eviction, and medical expenses. 

Withdrawals aren't the only way to crack the 401(k) piggy bank. Fidelity says 2.8% took loans from their retirement balances, up from 2.4% last year. Even more concerning: Fully 17.6% of workers now have an outstanding loan against their 401(k). 

Withdrawals and loans aren't just a sign of an increasingly troubled economy -- since they sap retirement savings, they also portend a weaker financial future for the growing number of individuals using those features.

Look for the hardship withdrawal rate to keep increasing, and not just for economic reasons: Starting in 2024, a new rule will allow withdrawals of up to $1,000 for emergencies without being subject to the 10% under-59 1/2 penalty. Unlike hardship withdrawals today, participants will be allowed to repay these sub-$1,000 withdrawals back into their accounts over three years. With empathetic intentions, Congress may instead be enabling financially destructive behavior. 

IRS rules allow hardship withdrawals for "an immediate and heavy financial need." Unless it's from a Roth account, these withdrawals are subject to taxation, including a potential 10% penalty for those who haven't reached age 59 1/2.

401(k) loans sound more benign-- and they can be -- but they have their own disadvantages. For example, the interest you pay "to yourself" comes from money that's already been taxed, and you'll pay tax on it again when you withdraw it in retirement. Also, if you don't pay them back on time -- or before changing jobs -- loans will be re-characterized as distributions subject to income taxes and the 10% penalty. 

Avoiding the need to tap retirement savings starts with building an emergency fund: Financial planners typically recommend having the equivalent of three to six months of living expenses in a liquid account such as a money market mutual fund. However, a January Bankrate survey found that 57% of American adults aren't even able to cover a $1,000 emergency expense. That percentage has almost certainly risen in the intervening 10 months. 

In a separate Fidelity survey, 8 out of 10 workers said inflation and the cost of living are causing them stress, with half saying it's enough to cause them to be distracted on the job. 

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