More Americans than ever facing financial stress are turning to their retirement savings to cover immediate expenses.
Some 6 percent of those with 401(k)s took hardship withdrawals from their accounts in 2025, up from 4.8 percent in 2024 and triple the pre-pandemic rate of 2 percent in 2018, according to a study preview released Wednesday by investment firm Vanguard.
A popular option for retirement plans, 401(k)s are offered by employers and allow most employees to contribute up to $24,500 a year. In many cases, employers match employee contributions up to a certain percentage.
Generally speaking, 401(k)s are a voluntary account that employees can sign up for. Recently, more employers have automatically enrolled employees into 401(k)s, leading to more chances for hardship withdrawals, Vanguard noted.
“For a small subset of workers facing financial stress, hardship withdrawals may serve as a safety net that may not otherwise have been available without plan-implemented automatic solutions,” the study said.
Drawing on desperation
A hardship withdrawal is typically a final resort after people have tried -and failed - to find other ways to cover their expenses. It means they are willing to take on income taxes, potential penalties and lost retirement income to get their money.
That sense of desperation mirrors recent studies pointing to the financial strain many feel right now. Some 40 percent of consumers are likely still carrying debt from holiday purchases.
Furthermore, 43 percent of consumers don’t have enough in savings to cover a $1,000 emergency expense, a U.S. News & World Report survey published this month found.
The decision to pull money from a 401(k) comes at a considerable cost at tax time, too.
Penalty pain
In general, the Internal Revenue Service considers as income any 401(k) withdrawals made before age 59 1/2. Therefore, employees under that age have to pay income tax on a hardship withdrawal.
Additionally, the IRS will penalize the employee 10 percent on the withdrawal if it doesn’t meet one of 12 Internal Revenue Service criteria. So, if someone does a $5,000 hardship withdrawal, they may have to pay an additional $500 penalty when they file their taxes.
The cost goes beyond a given tax year, though. It impacts how much money will be in the 401(k) at retirement time.
If a 35-year-old employee made a $1,000 hardship withdrawal today, that $1,000 would’ve been been worth $4,764.94 to $11,737.08 at retirement, had the money stayed in the account, based on average 401(k) returns, according to finance firm SoFi.
Withdrawal rules
Distributions from a 401(k) are tightly regulated. Hardship withdrawals must only be taken when the employee can prove to their employer that they have an “immediate and heavy financial need” and take out only the “amount necessary,” according to the IRS.
Generally speaking, an employee’s hardship automatically qualifies if the money is used for any of the following six reasons, according to the IRS:
- Medical expenses for the employee, their spouse, and any dependents or beneficiaries
- Buying a primary residence, but not the resulting mortgage payments
- Avoiding eviction
- The cost of repairs for damage to the employee’s primary residence
- Funeral expenses for the employee, their immediate family, dependents or beneficiaries
- Certain educational expenses for the upcoming year of postsecondary education for the employee, their immediate family, dependents or beneficiaries.
Outside of these reasons, the employee must make their case to their employer, which decides whether the situation qualifies as a hardship, according to the IRS.
Additionally, employees cannot take a hardship deferment unless they’ve made a reasonable effort to get the money from another source, including assets such as a vacation home.
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