401(k) Hardship Withdrawals Are At Record Highs: What They Really Cost You
The share of workers taking hardship withdrawals from 401(k) plans has climbed to a record high, according to Vanguard.
The investment firm found that 6% of participants used a hardship withdrawal in 2025, up from 5% in 2024 and just 2% in 2020.
“Right now, with gasoline and food prices up, it’s a difficult time,” said Steven Conners, founder and president of Conners Wealth Management in Scottsdale, Arizona.
Recent consumer price index data shows inflation at 4.2% in May 2026, with gasoline prices rising 40.5% year over year and food costs up 3.1%. As everyday expenses increase, more workers may be tempted to tap retirement savings for cash. Fidelity reports that average 401(k) balances fell 4% in the first quarter of 2026 compared with the prior quarter.
Financial experts warn that while hardship withdrawals can provide emergency access to funds, they often come at a high cost. Alternatives such as 401(k) loans, credit cards, or home equity financing may be less damaging in the long run.
Hardship withdrawals are only available under certain employer plans and are restricted to cases of “immediate and heavy financial need,” with withdrawals limited to the amount necessary to cover that need.
“A hardship withdrawal can only be used for very specific reasons,” said Michael Policar, a financial advisor with NGP Financial Planning in the Seattle area.
The IRS allows employers to define what qualifies as an immediate need, but common eligible uses include medical expenses, buying a primary home, education costs, preventing eviction or foreclosure, funeral expenses, and home repair costs. Vanguard notes that among its plans, 3% allow self-certification, 87% use a summary-based process without upfront documentation, and 10% require formal documentation.
“If you’re stuck, it’s your money,” Conners said, though he added that hardship withdrawals should be considered a last resort.
A newer option introduced under the SECURE 2.0 Act allows emergency withdrawals of up to $1,000 per year without penalty. These withdrawals require participants to maintain at least $1,000 in their account, and repayment options are available. If not repaid, the withdrawal option is limited to once every three years.
Hardship withdrawals can be costly. Traditional 401(k) withdrawals may incur administrative fees, mandatory 20% federal tax withholding, additional taxes depending on the individual’s bracket, and a 10% early withdrawal penalty for those under age 59½, unless exceptions apply. As a result, a $10,000 withdrawal could leave a person with $7,000 or less after taxes and penalties.
| Hardship Withdrawal Amount | Potential Lost Gains Over 30 Years |
| $5,000 | $87,247 |
| $10,000 | $174,494 |
| $15,000 | $261,741 |
| $20,000 | $348,988 |
Beyond immediate costs, experts emphasize the long-term impact of lost investment growth. Funds withdrawn no longer benefit from compounding returns. Using an average annual S&P 500 return of about 10%, even a $10,000 withdrawal at age 35 could mean forfeiting more than $174,000 in potential growth over 30 years.
“Once you take it, that’s it,” Conners said. “There is no giving it back.”
A 401(k) loan may be a less damaging alternative when available, allowing workers to borrow up to $50,000 or 50% of vested balance (with certain minimums). Because the loan is repaid with interest back into the account, it helps preserve investment growth, though job changes or missed payments can turn the loan into a taxable withdrawal.
Financial advisors also suggest considering other options, such as home equity loans or low-interest credit cards, which may be less costly than permanently reducing retirement savings. As one advisor noted, borrowing outside a retirement account can often preserve long-term growth that far outweighs the cost of interest payments.
Source: U.S. News & World Report
