Why more Americans are taking 401(k) withdrawals

Core Insights - A record 6% of workers in 401(k) plans withdrew money for financial hardships, up from 4.8% in 2024 and 3.6% in 2023, indicating a growing trend of hardship withdrawals [1] - The average withdrawal amount is $1,900, which could significantly impact future financial security if not managed properly [3] - New laws have made it easier for workers to take hardship withdrawals, with the Bipartisan Budget Act of 2018 and Secure 2.0 legislation providing more flexibility [4][6] Summary by Sections Hardship Withdrawals - Hardship withdrawals have increased for six consecutive years, with 13% of participants having an outstanding loan at the end of 2025 [2] - Common reasons for withdrawals include avoiding foreclosure or eviction and covering medical expenses [2] Financial Impact - The average withdrawal of $1,900 could grow to approximately $9,712.94 in 20 years if invested at an annual return of 8.5% [3] - Withdrawals not only reduce retirement savings but also incur income tax and a potential 10% penalty for early distribution [4] Legislative Changes - The Bipartisan Budget Act of 2018 removed the requirement to exhaust 401(k) loans before taking hardship withdrawals, making it optional for employer plans [5] - Under Secure 2.0, workers can withdraw up to $1,000 annually for emergencies without facing a 10% penalty, provided they repay it within three years [6] Financial Pressures - Many lower-income and younger workers face financial pressures from student loans, rising healthcare costs, and high credit card debt, making it difficult to avoid tapping into retirement savings [7][8]