You have cut the streaming subscriptions, skipped the vacation, and stopped eating out. Still, your credit card balance is not moving, and the mortgage payment is due Friday. So you log into your 401(k) account and start a hardship withdrawal, telling yourself you will pay it back later. You are far from alone. A record share of American workers pulled money out of their retirement accounts early last year. The reasons point less to careless spending and more to a squeeze that regular paychecks cannot cover anymore. Here is what the new numbers show. Here is what a hardship withdrawal actually costs once you count the taxes and penalties. And here is what to try before your retirement account becomes your emergency fund.
How Many Workers Are Raiding Their 401(k)s Right Now
Six percent of 401(k) participants took a hardship withdrawal in 2025. That is up from 4.8% in 2024, and more than triple the roughly 2% share seen before the pandemic. The figure comes from Vanguard’s 2026 How America Saves report, which tracks millions of workplace retirement accounts. Vanguard found the increase concentrated among lower-balance savers, not evenly spread across every income level. The typical withdrawal was not large. The median withdrawal was $1,900. That is not the size of a major life event. It is closer to an unpaid utility bill, a car repair, or a month of rent that fell short.
Why People Are Pulling Money Out Early
The reasons behind these withdrawals read like a list of financial emergencies rather than discretionary spending. Avoiding foreclosure or eviction accounted for 36% of hardship withdrawals in 2025, the largest category by far. Medical expenses ranked second at 31%. Tuition took 13%, home repairs took 11%, and a home purchase accounted for 5%. Four of those five categories describe a bill that could not wait, not a purchase someone chose to make.
That pattern lines up with what is happening outside of retirement accounts too. Total household debt in the United States is already sitting at a record $18.77 trillion. Credit card and personal loan balances have climbed alongside it, as everyday costs like groceries, insurance, and rent outpace paychecks. A retirement account starts to look like the only remaining source of cash. That is especially true once you have already tapped out a checking account, a credit line, and a personal loan.
What the SECURE 2.0 Act Changed
Part of the increase traces back to a rule change. The SECURE 2.0 Act now lets workers pull up to $1,000 a year for a personal or family emergency. It does not require the paperwork that a traditional hardship claim used to need. The withdrawal still counts as taxable income, but it skips the usual 10% early withdrawal penalty. Workers can repay it within three years if they choose to put the money back. That change made tapping a retirement account easier than it was a few years ago. It helps explain why more workers are doing it, even though lawmakers designed the rules for genuine emergencies only.
The Real Cost of Tapping Your 401(k) Early
Outside of that narrow $1,000 emergency provision, a standard hardship withdrawal comes with real costs. The money counts as ordinary income the year you withdraw it, which can push you into a higher tax bracket. Anyone under 59 and a half also typically owes the IRS a 10% early withdrawal penalty. Some exceptions can waive that penalty. Federal and state taxes and the penalty can shrink a $10,000 withdrawal to $6,500 or less. That is before the money even covers the bill you needed it for.
The higher cost is often invisible in the moment. Money you pull from a 401(k) in your 30s or 40s does not just disappear once. It stops compounding for every year it would have otherwise stayed invested. That can turn a $10,000 withdrawal today into tens of thousands of dollars in lost growth by retirement. A 401(k) loan causes less permanent damage than a hardship withdrawal. You repay it with interest. It avoids income tax and the penalty as long as you repay it on schedule. Leaving your job before you finish repaying it, though, can force you to repay the full balance right away.
Why This Signals More Than Bad Budgeting
A record share of workers raiding retirement accounts is not primarily a story about financial discipline. Vanguard’s 2026 analysis of its own retirement plan data points to a squeeze that ordinary paychecks increasingly cannot absorb. It is not a sudden lapse in judgment among millions of savers. Treating a 401(k) like a backup checking account does not fix the underlying gap between income and expenses. It just moves the shortfall from this month’s budget to a retirement account balance. That balance will need to recover the loss later. It usually skips the employer match and the market growth the money would have earned if it had stayed invested.
Better Options Before You Raid Your Retirement Account
Try a few steps before a 401(k) becomes the answer. Call your mortgage servicer or landlord directly if a payment is at risk. Many offer a hardship forbearance or payment plan that costs nothing to ask about. Contact medical providers about a payment plan or financial assistance program before a bill goes to collections. Most hospitals offer one and will negotiate before they sell the debt to a collector. A nonprofit credit counseling agency can build a debt management plan that lowers credit card interest rates. It does this without touching retirement savings at all. That conversation is typically free.
Falling short on this now also has a long tail. Carrying debt into retirement is already the norm, not the exception. 97% of retirees already carry some form of debt into their next chapter. Protecting whatever is left in a 401(k) today is one of the better ways to avoid a shrunken account later.
Frequently Asked Questions About 401(k) Hardship Withdrawals
What Qualifies as a 401(k) Hardship Withdrawal?
A hardship withdrawal generally requires an immediate and heavy financial need. That can include preventing eviction or foreclosure, paying for medical care, covering tuition, or repairing damage to a primary home. Plans set their own specific rules within IRS guidelines, so the exact list can vary by employer.
Do I Have to Pay Taxes and Penalties on a Hardship Withdrawal?
Yes, in most cases. A standard hardship withdrawal counts as taxable income. It also typically triggers a 10% early withdrawal penalty if you are under 59 and a half. A specific IRS exception can waive that. The separate $1,000 emergency withdrawal under the SECURE 2.0 Act skips the penalty. The IRS still taxes it as income.
Is a 401(k) Loan Better Than a Hardship Withdrawal?
Often, yes. A 401(k) loan avoids income tax and the early withdrawal penalty as long as you repay it on schedule. The interest you pay goes back into your own account. The main risk is that leaving your job can require repaying the full balance quickly, sometimes within days.
Can I Still Contribute to My 401(k) After a Hardship Withdrawal?
Yes. The SECURE 2.0 Act eliminated the older rule that paused contributions for six months after a hardship withdrawal. Most workers can now keep contributing right away and continue receiving any employer match.
How Much Does an Early Withdrawal Really Cost Over Time?
Beyond the immediate tax and penalty, the higher cost is lost growth. Money you withdraw in your 30s or 40s stops compounding for every remaining year until retirement. That can turn a $10,000 withdrawal into tens of thousands of dollars in missed growth by retirement.
Final Thoughts
A record number of workers reaching into retirement accounts to cover debt is not a personal failing. It is what happens when everyday costs climb faster than paychecks. Eventually, a fund meant to last thirty years starts to look like the only cash left. The choice in front of you is not whether the squeeze is real. It is whether a 401(k) loan, a payment plan, or a nonprofit credit counselor can solve the immediate problem. That way, you avoid permanently shrinking the retirement account you will eventually need.
Photo by Rifki Kurniawan: Unsplash