Americans are withdrawing retirement funds while still working — but there are limits to it
Americans use 401(k) accounts to save up for a comfortable retirement, and it's supposed to be left untouched while a person is still working. However, the affordability crisis has changed things by forcing people to withdraw money from their 401(k) accounts a lot earlier than intended. There are a number of reasons why this is the case, but Americans need to keep in mind that such withdrawals could lead to some problems in later years.
A USA Today report states that 6% of Vanguard retirement savers took hardship withdrawals from their 401(k) accounts. This is an all-time high as hardship distribution rates are up dramatically from 1.7% in 2020. This suggests that a significant number of Americans are having a hard time having savings other than their 401(k)s to cover emergencies. With prices not showing any sign of going down, this might just become the norm a few years down the road.
"It's still a small number, 6%, but it is something that is worth attention," said David Stinnett, head of strategic retirement consulting at Vanguard. Stinnett claimed that the median hardship withdrawal in 2025 totaled $1,900. Federal law has also become less stringent over the years when it comes to hardship withdrawals from 401(k) accounts. Since 2024, account holders have been permitted to withdraw up to $1,000 a year to cover an emergency expense.
The person withdrawing the money gets to choose what constitutes an emergency, which has made it even easier for people to withdraw money. However, such a withdrawal is only permitted once a year, and the recipient cannot do so for the next three years unless they are able to replenish the withdrawn amount. There are provisions that allow people to withdraw more than $1,000, but certain conditions have to be met.
As per the USA Today report, larger hardship withdrawals must serve an "immediate and heavy financial need." The amount withdrawn must also be just enough to cover that urgent need and not any more. In such a case, one’s employer decides what constitutes an immediate and heavy financial need. Despite these provisions, experts have advised people to avoid taking money out of their 401(k) accounts.
"Taking early withdrawals can stunt the long-term growth and compounding of retirement savings. Down the road, they will need that money when they retire," said Catherine Collinson, CEO of the nonprofit Transamerica Center for Retirement Studies. Withdrawals before the age of 59½ are subject to a 10% penalty, but that doesn’t apply to hardship withdrawals and certain other life events and emergencies.
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