401K hardship withdrawals hit record high last year, and rebuilding for retirement could be tough

BALTIMORE -- Inflation and high interest rates are hitting many people's pockets, prompting some to dip into their retirement plans to pay the bills. 

According to Vanguard, a record-high 3.6 percent of workers took hardship distributions from their 401ks in 2023.

But it comes at a cost. If someone takes money out of their 401k before they are 59 and a half years old, they must be prepared to pay the heavy taxes and a 10 percent penalty for withdrawing early.

Andrea Scott, the founder of Brownstone Tax and Financial Services, said Generation X, people born between 1965 to 1980, are the first generation to face the risk of limited social security.

According to a report from the National Institute on Retirement Security, 40% of Gen Xers have zero dollars saved for retirement.

Generation X is the first generation to shift away from pensions, especially in the private sector. 

But Scott said saving for retirement is even more challenging since many employers do not offer match contributions, so the issue of saving for retirement will only get harder for the generations to follow.

"If a person is taking 5, 6, 7,000 dollars, now you have to try to rebuild that back up," she said. "And we already don't know how long it took them to even put that amount of money into their retirement account."

She advises 18- and 19-year-olds to take action now by setting aside $50 from their paycheck to go to their retirement.

But for older people, Scott said it's time to look into another revenue stream.

"This day and age, try to get a second income," Scott said. "Whether, it's a small business or you take a small part-time job just to be able to put money into your 401K."