401(k) hardship withdrawals hit 6% in 2024, costing workers thousands in lost savings

A $10,000 early 401(k) withdrawal can reduce retirement savings by tens of thousands due to lost compounding. That’s the financial toll facing a growing number of workers who are tapping into their retirement accounts for hardship withdrawals. In 2024, 6% of 401(k) plan owners took such a withdrawal, according to Vanguard — a record high. These withdrawals are not just growing in number but in cost, as penalties and lost investment income compound over time.

Hardship withdrawals are now at record highs, driven by economic uncertainty, rising inflation, and income instability. Hourly-wage workers and those with less than $2,000 in emergency savings are disproportionately affected. Hardship withdrawals for amounts over $1,000 now incur fees under the Secure Act 2.0. Early 401(k) withdrawals before age 59½ trigger a 10% IRS penalty and higher tax rates on the withdrawn amount.

42% of hourly workers cash out their 401(k) when changing jobs, compounding the financial impact. Workers who take hardship withdrawals lose not just the money they take out, but the future growth that money would have earned. A $10,000 withdrawal today could cost tens of thousands in lost retirement savings.

Vanguard’s data shows that nearly half of Americans are struggling to afford everyday expenses, and more people are being automatically enrolled in 401(k) plans they may not be equipped to manage. The high cost of making a hardship withdrawal includes immediate taxes, fees, and long-term financial consequences. Workers are advised to build emergency funds, consider 401(k) loans, and consult financial planners before tapping into retirement savings.