401(k) Hardship Withdrawals Hit Record Highs
Recent data from Vanguard and Fidelity shows 401(k) hardship withdrawals at record highs as everyday costs rise and savings run thin. Understanding the long-term impact of pulling from your retirement and taking steps to build an emergency fund, can help you avoid setbacks and stay on track.
401(k) Hardship Withdrawals Are Rising Fast
Data shows more Americans than ever are turning to their 401(k)s just to stay afloat.
According to Vanguard Group, “Hardship withdrawal activity increased in 2024, with 4.8% of participants initiating a hardship withdrawal, up from 3.6% in 2023.”[1]
It’s worth noting the study shows 401(k) loan issuances were consistent with 2023 and remained below pre-pandemic levels.
Fidelity Investments reported similar findings with 401(k) hardship withdrawals more than doubling – from 2% in 2018 to 5% in 2024.[2]
Why Americans Are Raiding Their 401(k)s Right Now
MarketWatch reports 75% of workers say the rising cost of living is their biggest financial stressor.[2]
Goldman Sachs Retirement Survey & Insights Report 2025 backs this up: Almost 40% of workers say they live paycheck to paycheck.[3]
Even high earners aren’t immune – about 40% of households earning more than $300,000 report having little room to save.
This squeeze is called the “Financial Vortex” – a storm of higher housing costs, medical bills, child-raising expenses, student loans, and other financial demands.[3]
And as these pressures grow, more people are using their 401(k)s as a last-ditch emergency fund.
What Is a 401(k) Hardship Withdrawal
Hardship withdrawals are defined by the IRS as taking money out of your 401(k) because of an immediate financial need that’s limited to the amount to satisfy the hardship need – not the amount you want.[4]
The need of the employee also covers the employee’s spouse or dependents.
With a 401(k) hardship withdrawal, you pull money from your 401(k), and you cannot pay it back like you do a 401(k) loan.
Whether you qualify for a hardship withdrawal depends on certain circumstances “deemed to be immediate and heavy” and “limited to the amount necessary to satisfy that financial need,” defined by the IRS as a hardship.[4]
These include:
- Certain medical expenses
- Costs relating to the purchase of a principal residence (excluding mortgage payments)
- Tuition and related educational fees and expenses
- Payments necessary to prevent eviction from, or foreclosure on, a principal residence
- Burial or funeral expenses
- Certain expenses for the repair of damage to the employee’s principal residence that would qualify for the casualty deduction under IRS Section 165 [4]
If you qualify for a hardship withdrawal, the money you take out will be taxed as ordinary income if you are under age 59½, but you won’t have to pay the 10% penalty.
The Long-Term Cost of a 401(k) Hardship Withdrawal
Whether 401(k) investors need the money to cover medical bills, to stay off eviction, or to pay tuition expenses, it’s clear they’re hurting for extra cash right now.
And while a hardship withdrawal might feel like a short-term fix, the damage could last for decades.
Before you dip into your retirement savings, it’s critical to understand the implications of doing so.
- Not all plans allow for the hardship withdrawal. If your plan does allow for it, you will likely have to provide proof of the hardship and get approval that it meets the criteria.
- The money may not be immediately available. Each plan has a different set of rules it must follow so it may take weeks to get the money from your 401(k).
- Whether you qualify for a hardship withdrawal or not, you must pay taxes on the amount withdrawn – and it’s considered ordinary income. The last thing you want to do is get cash for a short-term need, only to find out it’s bumped you up to the next tax bracket. When all is said and done, the cost may outweigh the need.
- You’re removing money for your future – money that would have grown over time.
That last point is the one that can hurt the most.
When you contribute to a 401(k), your money earns interest, which compounds over time – meaning you earn returns on your returns.
Compounding works quietly in the background for you year after year.
When you pull money out, you lose not only the dollars you take, you lose the growth those dollars would have earned.
According to the Center for Retirement Research at Boston College, early withdrawals reduce overall 401(k) assets for retirement by 25% on average.[5]
That’s a huge setback for most Americans.
And it’s why taking a 401(k) hardship withdrawal should be a last-resort option.
The Root of the Problem: No Emergency Fund
It’s easy to blame hardship withdrawals on inflation or high prices.
But the deeper issue is this: Most Americans don’t have adequate emergency funds.
MarketWatch points out that workers without emergency savings are twice as likely to take a 401(k) withdrawal or loan.[2]
Goldman Sachs’ research backs this up.
Across all income levels, those without emergency savings struggle the most with retirement readiness.
Workers with at least 3 months of emergency savings report:
- Lower stress
- Fewer withdrawals
- Higher long-term financial wellness[3]
Without a cushion, even a small bill can push someone to raid their retirement savings.
How to Build an Emergency Fund That Protects Your 401(k)
Good news: you can start strengthening your financial safety net today – no big changes needed.
#1 Aim for at Least 3 Months of Essentials
You don’t need a year of savings right away. Start with the basics:
- Rent or mortgage
- Utilities
- Groceries
- Insurance
- Transportation
Small, steady steps make a big difference.
#2 Automate It
If it’s automatic, you don’t have to think about it. Set a transfer from checking to savings every payday.
#3 Start Small If You Need To
Even $20-$50 a week adds up. What matters most is consistency.
Goldman Sachs found something surprising: People with high “Financial Grit” save 49% more than others, regardless of income.[3]
It’s the habit, not the dollar amount, that matters.
#4 Keep It Separate from Your 401(k)
Emergency savings should be:
- Liquid
- Accessible
- Not tied to market volatility
A high-yield savings account or employer emergency savings program works perfectly.
Key Takeaways
401(k) hardship withdrawals are rising fast because Americans are stretched thin.
But you can take control…without sacrificing your future.
Here’s how:
- Build an emergency fund
- Choose loans over withdrawals when possible
- Stay engaged with your 401(k)
- Get professional support to avoid costly mistakes
You’ve worked too hard to let a temporary crisis damage your lifelong retirement goals.
Have questions or concerns about your 401(k) performance? Book a complimentary 15-minute 401(k) strategy session with one of our advisors.
Sources
[1] Vanguard Group. Vanguard Retirement Insights: 2025 Preview.
Released 2024.
[2] MarketWatch. 401(k) hardship withdrawals more than double as people raid their retirement savings for emergencies.
Published 2024.
[3] Goldman Sachs Asset Management. Retirement Survey & Insights Report 2025. Released 2025.
https://am.gs.com/cms-assets/gsam-app/documents/insights/en/2025/am-retirement-survey-102025.pdf
[4] Internal Revenue Service (IRS). Retirement Topics: Hardship Distributions.
Updated 26 August 2025.
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-hardship-distributions
[5] Center for Retirement Research at Boston College. How Do Early Withdrawals Affect Retirement Savings? Issue Brief 15-2.
Released 2015.
https://crr.bc.edu/wp-content/uploads/2015/01/IB_15-2.pdf
