Americans Are Saving More Than Ever. So Why Are More People Tapping Their 401(k)s?
Americans are saving more for retirement than ever before, yet more workers are also tapping their 401(k)s for financial emergencies. According to Vanguard’s How America Saves 2026 report, hardship withdrawals have tripled since 2021 despite record participation, savings rates, and account balances.
Takeaways
- Americans are saving more for retirement than ever before.
- Hardship withdrawals from 401(k) plans have tripled since 2021.
- Nearly half of workers who took a hardship withdrawal made more than one withdrawal in 2025.
- Early 401(k) withdrawals may trigger taxes, penalties, and lost compound growth.
- A 401(k) loan may cost less than a hardship withdrawal, but it still carries financial risks.
Americans Are Saving More for Retirement Than Ever
According to Vanguard’s How America Saves 2026 report, which tracks nearly 5 million plan participants, retirement saving hit a series of records in 2025.
Here’s what the data shows:
- Participation rate: 86% of eligible employees are now enrolled in their employer’s plan – up from 71% in 2016
- Average total savings rate: 12.1% (employee and employer contributions combined) – a record high; the median was 11.6%
- Average account balance: $167,970 – up 13% from 2024; the median balance reached $44,115 [1]
Much of this progress traces back to automatic enrollment.
Plans that automatically enroll employees achieve a 94% participation rate, compared with 64% for plans where employees have to opt in. [1]
By almost every measure, America’s retirement savings system is working better than ever.
So why are more workers taking money back out?
401(k) Hardship Withdrawals Have Tripled Since 2021
Hardship withdrawals from 401(k) plans have increased sharply, even as retirement savings rates have improved. In 2025, 6% of participants took a hardship withdrawal, up from 2% in 2021, according to Vanguard’s How America Saves 2026 report. [1]
That means hardship withdrawals have tripled in just 4 years.
And it’s not just the number of people taking withdrawals.
It’s how often they’re doing it.
In 2025, 46% of participants who took a hardship withdrawal made more than one withdrawal during the year, and 21% took three or more. [1]
The median withdrawal was just $1,900, suggesting many workers are using their retirement accounts to cover recurring financial needs rather than a single large emergency.
The most common reasons were serious housing and medical costs:
- Avoiding foreclosure or eviction: 36% of hardship withdrawals
- Medical expenses: 30% of hardship withdrawals [1]
For many families, the 401(k) has become the emergency fund of last resort.
What Does It Really Cost to Take Money out of Your 401(k)?
Taking money from a 401(k) before retirement can have both immediate and long-term costs. Depending on your situation, you may owe income taxes, an early withdrawal penalty, and lose years of future compound growth.
What Is a 401(k) Hardship Withdrawal?
A hardship withdrawal allows you to access your 401(k) if you have an immediate and heavy financial need.
Your plan administrator must approve it. The withdrawal is typically limited to the amount needed to cover the hardship.
Here’s the part many people miss: A hardship withdrawal does not automatically waive the 10% early withdrawal penalty. [2]
You still owe ordinary income taxes on the amount withdrawn.
And if you’re under age 59½, the IRS adds a 10% penalty on top of that.
Your employer is also required to withhold 20% in federal taxes upfront before you see a single dollar. [2]
The numbers add up fast.
Take a $25,000 withdrawal. If you’re in the 22% federal tax bracket, that’s $5,500 in income taxes. Add the 10% penalty, and that’s another $2,500.
You’ve lost $8,000 before you spend anything – and that doesn’t include state income taxes. [3]
What Happens to Your Compound Growth?
The tax hit is the immediate cost. The long-term cost is harder to see, but it may be even larger.
Money that leaves your 401(k) stops compounding.
That same $25,000, left invested for 25 years at 7% average annual growth, could have grown to over $135,000. [3]
Early withdrawals don’t just cost you today. They may cost you far more in retirement.
Are There Exceptions to the 10% Penalty?
Yes, and the IRS provides specific situations where the penalty is waived.
Common exceptions include…
- Separation from service at age 55 or older
- Total and permanent disability
- Unreimbursed medical expenses above 7.5% of your adjusted gross income
- Qualified domestic relations order as part of a divorce. [2]
SECURE 2.0 also added newer exceptions, including up to $1,000 per year for emergency personal expenses and up to $10,000 for victims of domestic abuse. [2]
Important: Income taxes still apply in most cases even when the penalty is waived.
And several of the newer SECURE 2.0 exceptions are optional for plans to adopt, meaning your plan may not offer them yet. [2]
Is a 401(k) Loan Better Than a 401(k) Hardship Withdrawal?
If you need access to funds, a 401(k) loan may cost less than a hardship withdrawal, but it comes with its own risks.
A loan is not a distribution.
As long as you repay it on time, no taxes are withheld and no penalty applies. You can borrow up to 50% of your vested balance, up to a maximum of $50,000, and repayment is typically required within 5 years. [3]
That sounds manageable. But the data tells a more complicated story.
According to Vanguard’s How America Saves 2026 report, 13% of participants carried an outstanding loan at year-end 2025, with an average loan balance of $11,034 – representing 8% of the average account balance. [1]
Participants without loans had balances 22% higher than those with loans. [1]
Loan use was highest among workers ages 45 to 54 – 19% of participants in their prime saving years carried a loan. [1]
And there’s one risk that catches people off guard: If you leave your job while you have a loan outstanding, the remaining balance typically becomes due immediately.
If you can’t repay it, the unpaid amount is treated as a taxable distribution, and may be subject to the 10% penalty if you’re under age 59½. [3]
A 401(k) loan is not without risk.
But for many people facing a short-term cash need, it may be a less costly option than a permanent withdrawal.
How Can You Protect Your Retirement Savings during Financial Stress?
If you’re feeling financial pressure, you’re not alone. But there may be steps you can take before turning to your retirement account.
Build an Emergency Fund outside Your 401(k)
Even a small cash cushion, 3-6 months of essential expenses, may reduce the pressure to tap retirement savings during a setback. Start small if you need to. The goal is to have somewhere else to turn first.
Capture Your Employer Match before Anything Else
If you’re considering reducing your contributions to free up cash, make sure you’re not dropping below the threshold that earns your employer match. That match is part of your compensation. Leaving it behind may cost you more than the short-term relief is worth.
Review Your Spending before You Borrow
A short-term budget review may reveal options that don’t require touching your retirement account at all. It’s worth taking a hard look before making a decision that may have long-term consequences.
Speak With a Financial Professional before Accessing Retirement Savings
The rules around hardship withdrawals and 401(k) loans are more complicated than they appear. A financial professional may be able to help you understand the full cost – and whether there’s a better path forward for your situation.
If you have questions about your 401(k) or if you need help, we’re here for you. Click below to book a complimentary 15-minute 401(k) Strategy Session.
Sources
[1] Vanguard. How America Saves 2026. June 2026. https://workplace.vanguard.com/insights-and-research/report/how-america-saves-2026.html
[2] IRS.gov. Retirement Topics: Exceptions to Tax on Early Distributions. December 2025. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions
[3] Empower / The Currency. 401(k) Withdrawal Rules: How to Avoid Penalties. September 16, 2025. https://www.empower.com/the-currency/money/401k-withdrawal-rules
