More Americans are withdrawing money early from their 401(k) retirement accounts to cover urgent expenses. This trend treats retirement savings more like an emergency fund than a long-term nest egg.
Hardship withdrawals from 401(k) plans are currently 15% to 20% higher than usual, according to Ed Murphy, CEO of Empower, the second-largest U.S. retirement plan provider. Vanguard data shows that 4.8% of 401(k) participants took hardship withdrawals in 2024, up from 3.6% in 2023.
A hardship withdrawal lets you take money out of your 401(k) to pay for an immediate and heavy financial need, such as medical bills or housing costs, as defined by the IRS.
Recent rule changes have made it easier to access these funds, but withdrawals still come with costs. If you are under 59½, you face a 10% early withdrawal penalty plus income taxes on the amount withdrawn.
Experts warn that tapping into retirement savings should be a last resort. Ed Murphy advises having an emergency savings fund with at least two years of expenses to avoid relying on retirement accounts during tough times.
Emergency savings in high-yield accounts or accessing home equity lines of credit (HELOCs) are safer alternatives. The average U.S. homeowner has about $303,000 in home equity, which can be used to cover large expenses at lower interest rates than credit cards or personal loans.
The IRS notes that hardship withdrawals are increasing due to economic pressures, including rising prices and falling consumer confidence.
While withdrawals can help in emergencies like avoiding foreclosure, they reduce the amount saved for retirement and the potential for future growth. For example, withdrawing $10,000 in your 30s could cost you over $117,000 in lost retirement growth over time.
Before making a hardship withdrawal, consider cutting expenses, using emergency funds, or shopping for lower insurance premiums to save money. If a withdrawal is necessary, consulting a financial advisor is recommended to understand the full impact on your finances.
