Cash-strapped U.S. residents invading retirement savings


Short on Cash, More Americans Tap 401(k) Savings for Emergencies

A rise in hardship withdrawals from retirement accounts is driven by financial strain and looser regulations, plan providers say

By Anne Tergesen

Feb. 2, 2023 5:30 am ET

Squeezed by higher prices and short on cash, more Americans are tapping their 401(k)s for financial emergencies.

A record 2.8% of the five million people in 401(k) plans run by Vanguard Group tapped their retirement savings in 2022 to cope with hardships such as medical bills, eviction or foreclosure, the company said. That is up from 2.1% in 2021 and a prepandemic average of about 2%.

This increase in the number of people taking hardship withdrawals is partly driven by several government moves since 2018 that have loosened the rules for taking such distributions from retirement accounts.  

Vanguard says individuals’ personal financial situation was also a factor, with U.S. households showing some signs of economic stress. In September, credit card balances returned to prepandemic levels. In December, Americans saved 3.4% of monthly income, down from 7.5% a year earlier. Companies including Inc. and Microsoft Corp. have recently announced layoffs.

The withdrawals are “evidence that some families may be feeling the pinch and drawing on their 401(k) balances to relieve that financial stress,” said Fiona Greig, global head of investor research and policy at Vanguard.

Although 401(k) plans are designed to keep Americans’ nest eggs out of reach until retirement age, the Internal Revenue Service allows savers to pull money out for certain economic hardships, including preventing foreclosure and eviction and covering medical and funeral bills. Other reasons defined as hardships include buying a primary home, paying college tuition and covering the cost of certain home repairs.

People who take money out for hardships are restricted to the amount they need. They must pay income tax on withdrawals from traditional accounts, plus often a 10% penalty if they are younger than 59½ years. The law also allows 401(k) plans to let participants borrow an amount that is generally up to half of their balance or $50,000, whichever is less.

The changing rules for making hardship withdrawals 

Under a 2018 law, Congress did away with a requirement to take a 401(k) loan before a hardship distribution. It also allowed plans to give people experiencing hardships access to the earnings on their contributions and some other amounts, rather than to their contributions alone, said Mark Iwry, a former Treasury Department official who oversaw national retirement policy in the Clinton and Obama administrations.

In 2020, Congress also let those affected by the Covid-19 pandemic pull as much as $100,000 from individual retirement accounts or 401(k)-type plans without the 10% early-withdrawal penalty that generally applies under age 59½. At Vanguard, 5.7% of eligible participants took such withdrawals that year.

In December, Congress passed a law that eliminates the requirement that savers must submit evidence of a hardship, such as an eviction notice, before making withdrawals. The law also paves the way for people to take some penalty-free early withdrawals for other reasons, including terminal illness and domestic abuse. It allows those affected by federally-declared disasters to take up to $22,000 penalty-free.

The changes underscore a growing acceptance among lawmakers, employers and workers of the idea that 401(k) and individual retirement accounts, which hold $20 trillion in wealth, do double duty as emergency funds

“There’s an understanding that for a lot of people, this is the only pot of money they have,” said Rob Austin, director of research at Alight Solutions LLC, a 401(k) provider to about 200 large plans.

Why Americans tap 401(k) funds 

About half of 401(k) participants taking hardship withdrawals do so to avoid eviction or foreclosure, said Mr. Austin. Another 15% pay medical bills and 10% pay college tuition.

The average size of a hardship distribution rose from $5,500 in 2021 to about $7,000 last year, according to Alight.

Another reason for the increase may be the growing number of employers automatically enrolling new hires in 401(k)-type plans, said Dave Stinnett, head of strategic retirement consulting at Vanguard. Lower-paid workers, a group that tends to rely more heavily on hardship distributions, are being swept into retirement plans in greater numbers, he said.

The increase in hardship withdrawals at Vanguard was in line with broader trends.

According to Fidelity Investments, the nation’s largest 401(k) plan administrator, about 2.4% of plan participants, or roughly 716,000 workers, tapped their retirement savings in 2022 to prevent hardships, a 26% increase over the prior year.

Among the 6.75 million people in the federal government’s $726 billion Thrift Savings Plan, 217,661 took hardship distributions in 2022, up 50% from 145,834 in 2021.

When to consider a hardship withdrawal 

Financial advisers say withdrawals from retirement accounts should be a last resort.

Those who fail to increase their savings after taking a distribution will be poorer when they retire. They will be missing not only the money they took out but also the returns that they could have earned through years of tax-advantaged investment.

Advisers recommend considering a 401(k) loan before taking a hardship distribution. The advantage is that borrowers must repay themselves with interest.

Those who default on loans from traditional accounts must pay income taxes and often a 10% penalty on the unpaid balance. Defaults often occur when an employee leaves a job with a loan outstanding and the 401(k) plan then requires the balance to be repaid fairly quickly.

Hardship withdrawals do have their place, advisers say.

“While hardship withdrawals are not the primary purpose of 401(k) plans, they can serve as a lifeline for many people in dire need,” said William C. Biddle, executive director of the Kentucky Public Employees’ Deferred Compensation Authority. It runs 401(k) and 457 plans for 85,000 state, county and municipal workers with an average salary of about $47,000. 

If the alternative to a hardship distribution is to use high-interest credit cards, “the hardship withdrawal may be a very viable option,” said Mike Shamrell, vice president at Fidelity.

Write to Anne Tergesen at

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