Americans are seeking financial relief and, in some cases, are even desperate enough to go against conventional financial wisdom. A record number of Americans are turning to their retirement funds to cover emergency expenses.
According to newly released data from Vanguard, 6% of 401(k) holders took hardship withdrawals last year. The number is up from 4.8% in 2024, and well above prepandemic levels of about 2%.
Taking funds out early is not recommended because early withdrawals from 401(k) plans are taxed. In addition, the funds incur a 10% penalty if the person withdrawing them is under the age of 59½. (The IRS does allow some exceptions to the penalty, including for disability, unreimbursed medical expenses, and first-time homebuyers.)
The new report noted that an uptick in hardship withdrawals is usually a sign of challenging financial times. However, it’s also worth noting that Congress has also made it easier to withdraw funds. In 2018, it passed the Bipartisan Budget Act, which removed the requirement to exhaust the loan option of the plan before taking a hardship withdrawal.
In 2022, the SECURE Act 2.0 also made a number of new exceptions to the early withdrawal penalty list. Those included reasons such as disaster relief, terminal illness, emergency expenses, and domestic abuse. “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 wrote in the report.
The investment management firm continued: “And for a small subset of workers facing financial stress, hardship withdrawals may serve as a safety net that may not otherwise have been available without plan-implemented automatic solutions.”