A record 4.8% of 401(k) account holders took hardship withdrawals last year, up from 3.6% in 2023, according to a report from Vanguard which examined data from nearly 5 million people. Hardship withdrawals allow savers to access their retirement funds early for an “immediate and heavy financial need,” but they are considered a last resort. Common reasons for taking hardship withdrawals include preventing foreclosure or eviction and covering medical bills.
Before the pandemic, about 2% of account holders took hardship withdrawals annually. 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 to take 401(k) distributions penalty-free. Those who take a hardship withdrawal before 59 1/2 have to pay a 10% early distribution tax, unless exceptions apply.
Hardship withdrawals reflect financial strain
Hardship withdrawals are also subject to income tax for those with a traditional 401(k). Another downside of a hardship withdrawal is that the money cannot be repaid into the 401(k) plan or moved into an individual retirement account (IRA), permanently reducing retirement savings.
For these 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 years.
More people are also falling behind on their car payments. Consumer confidence has recently declined as Americans grew more worried about inflation and future economic stability. Despite these concerns, Vanguard’s report also highlighted some positive news.
Average account balances were up 10% in 2024 from the year prior, reaching an all-time high of $148,200. This 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.”
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