A report from Vanguard in 2026 highlights that a record 6% of 401(k) participants withdrew funds from their accounts for financial hardships in 2025. This marks a steady increase from 4.8% in 2024 and 3.6% in 2023. While having access to these funds can serve as an important safety net, withdrawals should generally be considered a last resort.
Why a Hardship Withdrawal Can Be Costly
One of the major drawbacks of a hardship withdrawal is its long-term impact on your retirement security. Unlike a 401(k) loan, a hardship withdrawal typically does not allow for repayment. Once the money is taken out, you cannot return it, leading to a permanent loss of tax-deferred growth.
That can have a lasting effect. Even a modest withdrawal today could mean significantly less in retirement later because of lost compounded returns.
When a 401(k) Hardship Withdrawal May Be Allowed
To qualify, the IRS mandates that a participant must prove an “immediate and heavy financial need.” Most plans utilize “Safe Harbor” provisions, which generally means that certain expenses are automatically considered to meet that standard, provided the participant does not have another available source of funds to cover the need. These expenses may include:
Medical Expenses: Unreimbursed costs for the participant, spouse, or dependents.
Eviction/Foreclosure: Funds to prevent the loss of a primary residence.
Primary Residence Repairs: Costs resulting from casualty losses, such as FEMA-declared disasters.
Funeral Expenses: Burial or funeral costs for family members or beneficiaries.
Primary Home Purchase: Costs for a down payment or closing costs (excluding mortgage payments).
Educational Expenses: Tuition and related fees for the next 12 months of post-secondary education.
Taxes and Penalties to Consider
Because 401(k) contributions are typically made pre-tax, hardship withdrawals are taxable as ordinary income. If you are under 59½ years of age, your withdrawal may also be subject to a 10% early withdrawal penalty.
Recent legislative updates, such as the SECURE 2.0 Act, have introduced a small measure of flexibility, allowing participants to take one “emergency personal expense” withdrawal of up to $1,000 per year penalty-free. Additionally, unlike traditional hardship withdrawals, this $1,000 can be repaid within three years to restore the account’s balance. However, this option should still be evaluated carefully.
Consider Other Options First
If you are facing financial strain, it may make sense to explore other available resources before using retirement savings. Depending on your situation, that could include emergency savings, payment plans, insurance coverage, or other sources of short-term support.
While 401(k) hardship withdrawals may help address an immediate need, they can also come with long-term tradeoffs. Before taking money from your retirement account, make sure you understand the rules, tax consequences, and impact on your future financial security.
