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401(k) hardship withdrawals

Working Americans face many competing financial priorities, from saving for retirement to paying off student loans, health care savings, credit card debt, emergency savings and mortgage debt.

As the Vanguard data shows, more Americans are tapping into their retirement savings early — with some needing the extra cash to satisfy other, more pressing financial obligations.

Workers with a 401(k) can access their retirement savings through a variety of mechanisms, including through a loan (borrowing against their account balance) or what is known as a hardship distribution.

Many 401(k) plans allow you to withdraw money before you actually retire to pay for certain events that cause you financial hardship. The Internal Revenue Service allows early withdrawals to prevent eviction or foreclosures and to cover surprise medical expenses, funeral expenses and tuition expenses.

But as Schlesinger and many other personal finance experts stress, there are consequences to consider before dipping into your retirement savings.

“Here’s a problem with a withdrawal: you take the money out [and] it’s taxed at whatever tax bracket you’re at,” Schlesinger said. “If you’re under age 59-and-a-half, there’s an additional 10% whack of a penalty. This is a double-tax whammy!

“Also, it’s really hard, once you get that money out, to get it back in. I think that’s the problem. Retirement experts are really worried we’re using these accounts too frequently to pay for, maybe not emergencies, just day-to-day bills.”

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Good news in the numbers

While any increase in 401(k) hardship withdrawals is concerning for the simple reason that Americans may be jeopardizing their retirement security, some comfort may be drawn from the fact that 96% of 401(k) plan participants are “generally resilient,” according to Vanguard, and they “maintain a long-term approach to retirement saving, even during volatile and uncertain economic times.”

Vanguard’s “How America Saves 2024” report — which examines retirement plan data from nearly 5 million defined contribution Vanguard plan participants — also shows that 43% of plan participants increased their retirement savings rate in 2023, with 28% reaping the benefits of an annual automatic escalation in their payroll deferral percentage.

Average 401(k) account balances also grew by around 19% in 2023, thanks partly to the U.S. stock market’s bull run in 2023, with the S&P 500 gaining 24%. The median 401(k) account balance was $35,286, up 29% since year-end 2022.

“This was an incredibly happy occasion for me because we found out that … participation is up,” said Schlesinger. “Eighty-five percent of people are participating [and] they’re putting more money in.”

Maintaining this type of positive momentum in your retirement savings is easier said than done — especially when you’re up against tough money challenges like inflation, high mortgage rates, student loans and so on.

If you’re feeling stuck, you may want to consider working with a financial adviser, who can help you meet your short- and long-term financial goals.


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About the Author

Bethan Moorcraft

Bethan Moorcraft


Bethan Moorcraft is a reporter for Moneywise with experience in news editing and business reporting across international markets.

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