Vanguard finds more Americans are treating their 401(k)s like emergency funds

So it’s possible that hardship withdrawals could increase in 2025. “Given the current economic climate, a greater number of participants may be requesting hardship distributions from their retirement plans,” the IRS currently states on its website updated this month.

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Generally speaking, a hardship withdrawal is considered a last resort. If you’re thinking about going this route, you may want to exhaust all other options first.

If you’ve already used up your emergency fund, you may want to consider other sources of income. For example, if you have two vehicles, could you sell one of them? Could you take on a side gig to earn extra money? Could you get a roommate to cut down on household expenses?

You may be able to withdraw from your other retirement savings, such as a Roth IRA (that could be preferable to a hardship withdrawal, because these contributions have already been taxed). You may want to consult with your financial advisor to crunch the numbers.

Another option is a 401(k) loan, which you have to pay back — but at least the interest you pay on the loan goes back into your account. However, not all plans offer 401(k) loans; you’ll have to check with your HR department to see if this option is available to you.

When you make a hardship withdrawal, that money is considered taxable income. Plus, you’ll be subject to a 10% early withdrawal penalty unless you’re age 59½ or older or qualify for another exception. These may include the birth or adoption of a child, a federally declared disaster, or total and permanent disability.

You may also be able to take one penalty-free withdrawal of up to $1,000 per calendar year for personal or family emergency expenses, but you will have to repay the distribution within three years.

There are also the long-term costs of hardship withdrawals. You’ll lose out on the compounded earnings you could have made from that money if it was still sitting in your account.

If you’ve exhausted all other options and still decide to go ahead with a hardship withdrawal, talk to your plan administrator so you understand how it works and the potential consequences.

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.