Early 401(k) withdrawals hit a record high

Early 401(k) withdrawals have reached a record high among Americans. Around 4.8% of 401(k) account holders took early withdrawals in 2024, a record high, due to financial emergencies, The Wall Street Journal revealed. The 401(k) seems to have become a rainy-day fund for average Americans due to automatic enrollment and easier access to retirement savings for emergencies.

Despite rising retirement account balances, Americans are facing conflicting economic forces, with low unemployment and rising consumer prices. Recently, under the new Trump administration, fresh tariffs have been imposed on goods from countries like Canada, China and Mexico, leading to highly inflated prices of everyday items like local produce, groceries, automobiles and more in addition to electronics and other imported goods in the United States.

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Mass layoffs across the federal and tech sectors since President Donald Trump took office in January could also be a major driver for average Americans to break their 401(k) savings.

Moreover, a bird flu outbreak in the country has severely increased the prices of eggs, a common man’s food, in the country, which might’ve led to consumers taking desperate measures such as breaking their 401(k) deposits to fund their meals.

While the 401(k) was originally intended as a tax-advantaged way to pay for retirement, it has increasingly become something Americans turn to when in financial need. The shift towards higher 401(k) withdrawals are due to a number of different reasons, ranging from conflicting financial forces with rising prices, to rising values in the accounts.

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While an early 401(k) withdrawal can seem appealing for many, it also comes with certain disadvantages. When an account holder makes an early withdrawal from a 401(k) — defined as any money pulled out of accounts before they reach the age of 59 and a half years — they’ll generally face a 10% tax penalty on the amount (though there are some exceptions). In addition, they will also owe the applicable income taxes on the amount withdrawn. So essentially, withdrawing from 401k subtracts from the retirement fund, as well as the interest earned on the withdrawn funds.

Exceptions to the withdrawal penalty are available in special instances like total and permanent disability, terminal illness, losing or leaving a job at age 55 or older, and others. For many, 401(k) loans are seen as a better option. Nevertheless, many do go for early 401(k) withdrawals. One notable instance has been of Minnesota Governor, and former vice presidential candidate Tim Walz, who made a withdrawal to fund his daughter’s college education.