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.

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[–] 23 points 6 months ago (21 children)

Why the actual fuck do we need to pay a penalty on our own money? We put the money in, it’s my fucking money. I love how something absolutely fucked up needs to happen just so you get the luxury of paying a fee on TOP OF fucking your savings over just so you can get over the hurdle of what ever terrible happened.

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  • [–] 22 points 6 months ago (14 children)

    Because that was the deal to be allowed to invest that money without paying taxes

    The goal, at a societal level, is the incentivize keeping it in a retirement fund

    You can always pay yaxes and invest the money in a brokerage account if you don't want to risk penalties

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  • [–] 4 points 6 months ago (11 children)

    That’s fine but why does the incentive become a hurdle when life gets in the way? If I lost my job, and my house, and needed money, getting penalized for having life happens doesn’t look like an incentive anymore.

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  • [–] 5 points 6 months ago (7 children)

    Because if you didn't do that, everyone would put 100% of their money into their 401k (at least up to the contribution limit) and then withdraw it right back out to avoid paying taxes on it.

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  • [–] 2 points 6 months ago (6 children)

    You pay taxes when you withdraw. The 10% is additional penalty for early withdrawal.

    You are generally better off doing a loan if your plan allows since you pay yourself back with interest. Of course that requires you to be employed and planning on staying at that job until it's repaid.

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  • [–] 3 points 6 months ago (2 children)

    I understand that, but the other user can't seem to imagine why they won't let you withdraw this tax-free income without any sort of penalty.

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  • [–] 3 points 6 months ago (2 children)

    You pay income taxes when you withdraw (meaning withdrawals are treated as income). However, 401ks also have the benefit of not being taxed while they grow. So you can contribute money pre-tax and don't pay taxes while the money grows.

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  • [–] 4 points 6 months ago (2 children)

    Because the cost of the agreement is the promise not to withdrawal. Otherwise you're asking for something for nothing.

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  • [–] -1 points 6 months ago (1 child)

    So I should have foresight to years later if I may have a life altering instance happening in my future?

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  • [–] 1 point 6 months ago

    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.

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  • [–] 4 points 6 months ago*

    That's just one reason 401k is shitty. 401k was invented by Wall Street to enable them to use our retirement money as "float" and collect fees on top of that. It was sold to companies as a less expensive replacement for the pension plans most jobs used to offer back in the day. It was sold to employees as a "set it and forget it" way to do "investing", and somehow became the default option.

    A 401k just rides on top of the stock market and gives the bare minimum of control to the user. Everyone has the same shitty dozen or so conglomerated investment funds to choose from. All that while the operators collect fees that might seem small to the layperson, but if those fees were allowed to compound they would actually make a massive difference in their wealth over a long career.

    If your company offers a match, yeah, take the free money. Sometimes you're allowed to take loans as well which can help if you have tons of debt. (The cool thing about those is the interest gets paid into your own account). Otherwise, basically anything else is the way to go, whether that's a self-directed IRA or even just a regular brokerage account, real estate, literally anything. The only problem being the learning curve, but learning is more accessible than ever. If you really don't want to learn there are also broker-managed accounts now that are fairly cheap.

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  • [–] 3 points 6 months ago (2 children)

    Taxes exist to shape behavior. The behavior they wanted to shape was to get you to save for your own retirement.

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