One out of every three Americans withdraws their 401(k) funds after leaving their employment: What factors are driving this increase?

Many Workers Withdraw Entire 401(k) Balances After Leaving Jobs

According to Vanguard, individuals who decide to cash out their 401(k) accounts are often inclined to withdraw the entire amount rather than just a portion.

Main Points

• In 2023, one out of every three people with a Vanguard-managed 401(k) who left their job chose to withdraw their full balance in a single payment, instead of transferring it to a new employer’s plan or another retirement account.
• Withdrawing funds from a 401(k) before reaching age 59½ usually results in a 10% penalty, and the withdrawn amount is also subject to income tax.

Although Americans are contributing more to their 401(k) accounts than before, a significant portion of these savings is not preserved for retirement. Many employees opt to take out their entire 401(k) balance when they leave a job, rather than rolling it over or leaving it in place. Vanguard’s latest research reveals that a third of departing employees with their plans made this choice in 2023.

Impact on Retirement Readiness

Kelly Hahn, who leads retirement research at Vanguard, emphasizes that cashing out retirement savings can seriously jeopardize financial security in later years.

Taking money from a 401(k) before age 59½ not only triggers a 10% early withdrawal penalty for most people, but also requires paying income taxes on the amount. This means savers lose both the money and the growth it could have generated, undermining their ability to cover future retirement expenses.

Vanguard’s data shows that hourly workers are more likely to face these penalties. Among those who left their jobs, 42% of hourly employees cashed out their retirement accounts, compared to just 21% of salaried workers.

Even when comparing workers with similar incomes, those paid hourly were 10 to 15 percentage points more likely to cash out than their salaried counterparts, possibly due to greater income instability.

Full Withdrawals Are Common

People who choose to cash out their 401(k) accounts typically withdraw the entire balance. Vanguard suggests this may be because it’s one of the few times savers can access the full amount, unlike hardship withdrawals or loans, which have limits. However, there’s no definitive evidence explaining this behavior.

A June 2025 survey from the Transamerica Center for Retirement Studies found that 37% of workers have taken a loan, early withdrawal, or hardship withdrawal from their 401(k), IRA, or similar retirement account.

Why Do People Tap Into Retirement Savings?

Across all age groups, the most common reason for borrowing from a 401(k) or similar plan is to cover a financial emergency, according to the Transamerica Center. Other motivations include paying off existing debt, managing daily expenses, handling unexpected large costs, covering medical bills, and making home repairs or improvements.

Financial advisors highlight the importance of having an emergency fund to reduce the need for early withdrawals from retirement accounts.

For instance, Vanguard reports that individuals with at least $2,000 in emergency savings are less likely to take out loans or hardship withdrawals, and are 43 percentage points less likely to cash out their retirement savings after leaving a job compared to those with smaller reserves.