More Americans tapping 401(k)s to pay for financial emergencies

(NewsNation) — More Americans are raiding their retirement savings to cover emergency expenses, taking early withdrawals from their 401(k)s.

A record 4.8% of account holders took hardship withdrawals last year, up from 3.6% 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% 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% of 401(k)-type plans through Vanguard automatically enrolled new hires, up from 36% 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% 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 Donald Trump's trade war.

But Vanguard's report also had good news.

Average account balances were up 10% 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%, the highest percentage since Vanguard started tracking the metric in 2019.

Vanguard concluded that the sub-5% hardship withdrawal rate suggested that participants remain "generally resilient" and are maintaining a "long-term approach to retirement saving."