More Americans are raiding their retirement savings to cover emergency expenses, taking early withdrawals from their 401(k)s.
A record 4.8 percent of account holders took hardship withdrawals last year, up from 3.6 percent in 2023, according to Vanguard Group, which examined data from nearly 5 million people with 401(k)-type accounts.
Hardship withdrawals let savers tap their retirement funds early for an “immediate and heavy financial need” but are widely seen as a last resort. The most common reasons for taking them are preventing foreclosure or eviction and covering medical bills.
Before the pandemic, about 2 percent of account holders took hardship withdrawals annually — less than half the latest share, according to Vanguard data.
The recent uptick could signal growing financial distress, but two other factors may also be driving the increase.
First, more employers are automatically enrolling workers in retirement plans, meaning the pool of those with otherwise little savings has likely grown larger. Last year, 61 percent of 401(k)-type plans through Vanguard automatically enrolled new hires, up from 36 percent in 2014.
Second, Congress has made it easier to request hardship withdrawals in recent years. Federal legislation in 2018 relaxed restrictions and ended a requirement that workers must take out a loan before taking a hardship withdrawal.
“Given that it’s now easier to request a hardship withdrawal and that automatic enrollment is helping more workers save for retirement, especially lower-income workers, a modest increase isn’t surprising,” Vanguard noted in the report.
Generally, workers have to wait until they are 59 1/2 (or 55 in certain cases) to take 401(k) distributions penalty-free. So, those who take a hardship withdrawal before 59 1/2 have to pay a 10 percent early distribution tax unless an exception applies. Hardship withdrawals are also subject to income tax for those with a traditional 401(k).
The other downside of a hardship withdrawal is that you can’t repay the money into your 401(k) plan or move it into an individual retirement account (IRA), so the distributions permanently reduce your retirement savings.
For those reasons, hardship withdrawals are typically considered a last resort option, intended for those in dire situations. Vanguard’s latest data is another potential warning sign that Americans are financially strained.
Last year, credit card delinquencies in the U.S. reached their highest level in over a decade. More people are also falling behind on their car payments. Consumer confidence recently took a nosedive as Americans grew more worried about inflation and the possible consequences of President Trump’s trade war.
But Vanguard’s report also had good news.
Average account balances were up 10 percent in 2024 from the year prior, reaching an all-time high of $148,200. That was due to a strong stock market and increased contribution rates.
The share of plan participants who increased their savings rate in 2024 reached 45 percent, the highest percentage since Vanguard started tracking the metric in 2019.
Vanguard concluded that the sub-5 percent hardship withdrawal rate suggested that participants remain “generally resilient” and are maintaining a “long-term approach to retirement saving.”
