Data from Vanguard shows Americans are pulling money out of their retirement accounts early at record rates to help make ends meet.
Last year, 6% of Vanguard’s clients took a hardship withdrawal, which allows them to access funds in tax-advantaged retirement accounts, such as a 401(k), before they reach retirement age. That was up from 4.8% in 2024, the asset management giant said.
Taking a hardship withdrawal is not ideal for a few reasons, one of them being that investors are subject to a withdrawal penalty of 10% for taking money out of their account before 59½. On top of that, they are then taxed on any gains. However, perhaps most importantly, they rob themselves of future growth potential on that money, especially if they are still far from retirement age.
Putting fees on early withdrawals actually disincentivizes people from using 401ks or Roth IRAs. I’ve been unemployed for 3 of the last 5 years and I know that I will not be investing in retirement accounts until I have several years of steady employment under my belt, simply because I know I may need that money. The job market simply isn’t stable enough for me to even think about parking my money somewhere I can’t access it. I know I’m not alone.
I get what you’re saying but they should at least allow you to withdraw if you become unemployed.