More Americans than ever before are tapping in to their 401(k) funds to cover money emergencies – another warning sign that the economy is struggling and a recession looms.
Nearly five percent of retirement account holders made early withdrawals last year for expenses like medical bills or avoid foreclosure on their home, according to Vanguard Group.
That’s a record high, up from 3.6 percent in 2023.
Before the pandemic, just two percent of 401(K) holders would withdrew funds before the typical access age of 59 and a half.
The sharp increase suggests more households are feeling financial strain.
In a worrying sign for the economy Americans are falling behind on car payments at record rates with nearly 6.6 percent of subprime auto borrowers behind on payments in January.
Around 35 percent of those who made a withdrawal last year used the money to avoid foreclosure on a house they were buying or eviction from a rented home.
Meanwhile, more Americans than ever have been auto-enrolled in workplace retirement plans, making 401(k)s the largest savings vehicle for many workers.
But rising mortgage rates and years of inflation have pushed more people into financial distress, struggling to keep up with car payments and credit card debt.
Almost five percent of those who have a retirement account made early withdrawals last year
More Americans than ever have been auto enrolled into company pension schemes, making 401(k)s the biggest savings pot many workers have.
‘While experiencing hardship is not a good thing, having savings to turn to is a positive,’ David Stinnett, head of strategic retirement consulting at Vanguard said of the findings.
Recent policy changes have made it easier to use retirement savings as a rainy day fund.
Before 2018, Americans had to take a 401(k) loan before accessing their account. Around 13 percent of savers had outstanding 401(k) loans at the end of 2024, according to Vanguard.
The Internal Revenue Service (IRS) now allows usually locked-up accounts to be drawn from to deal with hardships, including paying college tuition and buying a home.
The number of early withdrawals may rise even further as 401(k) plans launch a new provision following a 2022 law that allows for one penalty-free withdrawal of up to $1,000 a year to cover emergency expenses.
The median withdrawal last year was $2,200.
Despite increasing ease of access, tapping into the funds usually comes with penalties that can further deplete a nest egg.
There were some steep losses over the past week as investors were rattled by Trump’s tariff-related headlines
The Dow Theory – long trusted by traders to forecast the broader market’s next move – is suggesting investors brace for more losses
Those who take hardship withdrawals from traditional 401 (k) accounts must pay income tax on the amount as well as a ten percent penalty in they are younger than 59 and a half years old.
Last year 401(k) balances rose an average of ten percent after a bumper year of stock market returns that saw the S&P 500 rise a staggering 25 percent.
Stocks have been on a turbulent ride since Donald Trump began his second presidency in January.
Wall Street saw steep losses over the last week as investors were rattled by Trump’s tariff-related headlines.
Amid the economic uncertainty and political headwinds, the Dow Theory – long trusted by traders to forecast the broader market’s next move – is suggesting investors brace for more losses.
