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More Americans Are Treating Their 401k Like an Emergency Fund
March 4, 2025
More Americans are treating their retirement accounts like rainy day funds.
Last year saw a record-high 4.8% of 401(k) holders take emergency hardship withdrawals from their accounts, according to the Vanguard Group. That’s up from 3.6% in 2023 and well above the 2% average seen in the years leading up to the pandemic.
Americans are increasingly treating their 401(k) accounts like emergency funds partly just because more Americans have them. More employers are automatically enrolling their workers, allowing these workers to amass savings that they otherwise would not have. They are able to access these savings more easily because of recent changes Congress made to the rules governing hardship withdrawals. While hardship withdrawals from 401(k)s are allowed, they come with penalties for those under 59½ and income tax liabilities. However, new provisions in 2022 now allow one penalty-free withdrawal of up to $1,000 annually for emergency expenses as long as the amount is repaid.
American workers are also facing a crosscurrent of economic factors that are pushing them toward 401(k) withdrawals. Unemployment is low and wages are climbing, pushing more money into retirement accounts, and after the strong stock market performance of the last few years, balances have grown. At the same time, prices are still rising, consumer confidence is falling, and more people are falling behind on their car loans and credit card bills.
Roughly 35% of those who took a hardship withdrawal last year did so to avoid foreclosure or eviction, while about 16% did so for a home purchase or home repair. The average amount withdrawn was $2,200.
Despite the withdrawals, 401(k) balances rose about 10% on average last year, hitting a record high of $148,153. The share of participants with outstanding 401(k) loans at the end of 2024 remained at the 2023 level of 13%.
While hardship withdrawals from 401(k) accounts can provide quick access to funds in times of financial need, they come with significant drawbacks. Not only do withdrawals before age 59½ incur a 10% penalty, but they are also subject to income tax, which can substantially reduce the amount received. Additionally, taking money out of a retirement account means sacrificing potential future growth, which can undermine long-term retirement goals. As a result, it’s important to carefully weigh the immediate financial relief against the long-term impact on retirement savings before tapping into a 401(k).
