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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[–] 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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