A record 4.8% of account holders took hardship withdrawals last year, up from 3.6% in 2023, according to Vanguard Group, which examined data from nearly 5 million people with 401(k)-type accounts.

Hardship withdrawals let savers tap their retirement funds early for an "immediate and heavy financial need" but are widely seen as a last resort. The most common reasons for taking them are preventing foreclosure or eviction and covering medical bills.

What is a 401(k) plan? 

Before the pandemic, about 2% of account holders took hardship withdrawals annually — less than half the latest share, according to Vanguard data.

The recent uptick could signal growing financial distress, but two other factors may also be driving the increase.

First, more employers are automatically enrolling workers in retirement plans, meaning the pool of those with otherwise little savings has likely grown larger. Last year, 61% of 401(k)-type plans through Vanguard automatically enrolled new hires, up from 36% in 2014.

Second, Congress has made it easier to request hardship withdrawals in recent years. Federal legislation in 2018 relaxed restrictions and ended a requirement that workers must take out a loan before taking a hardship withdrawal.

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"Given that it's now easier to request a hardship withdrawal and that automatic enrollment is helping
more workers save for retirement, especially lower-income workers, a modest increase isn't surprising," Vanguard noted in the report.

Generally, workers have to wait until they are 59 1/2 (or 55 in certain cases) to take 401(k) distributions penalty-free. So, those who take a hardship withdrawal before 59 1/2 have to pay a 10% early distribution tax unless an exception applies. Hardship withdrawals are also subject to income tax for those with a traditional 401(k).

The other downside of a hardship withdrawal is that you can't repay the money into your 401(k) plan or move it into an individual retirement account (IRA), so the distributions permanently reduce your retirement savings.