More Americans are tapping 401(k) funds for emergencies

More Americans are using their 401(k) retirement funds to deal with financial emergencies, raising concerns about the economy. Last year, nearly five percent of people with 401(k) plans made early withdrawals, which is the highest amount recorded. This is an increase from 3.6 percent in 2023 and just two percent before the COVID-19 pandemic. Many people are struggling to keep up with expenses, including medical bills and housing costs. A significant portion of last year's early withdrawals was used to avoid foreclosure or eviction. Additionally, auto loans show a similar trend, with 6.6 percent of subprime auto borrowers falling behind on payments in January. Despite more people being enrolled in workplace retirement plans, financial pressures from rising mortgage rates and inflation are affecting households. A report from Vanguard found that approximately 35 percent of those who withdrew money from their 401(k) did so to avoid losing their homes. Changes in policy have made it easier for Americans to access retirement savings for emergencies. Prior to 2018, people had to take loans from their 401(k) accounts to access funds. Now, new rules allow for penalty-free withdrawals up to $1,000 per year for emergencies. However, early withdrawals can come with penalties, including taxes and fees, especially for those under 59 and a half years old. Despite the challenges, the average balance in 401(k) accounts rose about ten percent last year, thanks to strong stock market performance. Investors are becoming anxious due to ongoing economic uncertainty and political issues, including recent tariff-related news. Some market indicators suggest that there could be further losses ahead for investors.