More Americans than ever are tapping their 401(k)s for emergency cash

"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."

"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. 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."

A record 6% of 401(k) holders took hardship withdrawals last year, up from 4.8% in 2024 and significantly above prepandemic levels of 2%. Early withdrawals incur taxes and a 10% penalty for those under 59½, though some exceptions exist for disability, medical expenses, and first-time homebuyers. The increase reflects challenging financial times for many Americans. However, legislative changes have made hardship withdrawals more accessible. The 2018 Bipartisan Budget Act eliminated the requirement to exhaust loan options first, and the 2022 SECURE Act 2.0 expanded penalty exceptions to include disaster relief, terminal illness, emergency expenses, and domestic abuse. Vanguard notes that easier access combined with automatic enrollment helping lower-income workers save has contributed to the modest increase, with hardship withdrawals serving as a critical safety net for financially stressed workers.

Read at Fast Company