401K Hardship Withdrawals Are Rising: What It Could Mean for Your Financial Plan

Everyone knows that 401ks are meant for retirement – but 2025 saw a record rate of “hardship” withdrawals, which are 401k withdrawals taken before retirement.

It’s a concerning trend, both because it indicates that some Americans are out of financial options – their emergency funds have been exhausted or simply don’t exist – and because it will eventually have a much larger long-term impact on their readiness for retirement.

WHY 401K HARDSHIP WITHDRAWALS ARE RISING

While there’s no way to know exactly why these withdrawals are becoming more common, we can certainly theorize. Inflation the past few years means overall prices are up 26% from 6 years ago. The most common 401k hardship withdrawal reasons are to make it possible to keep a home and to cover medical costs – two categories of costs that have risen even more than average over the past year.

In addition, some changes to 401k plans could be adding to the increase: The IRS has relaxed some requirements for requesting hardship withdrawals, and the popularity of autoenrollment into 401ks means some people are probably joining their plans that otherwise wouldn’t have – and those people may not be as bought into the importance of retirement savings.

WHAT IS A 401K HARDSHIP WITHDRAWAL?

A hardship withdrawal, also known as a hardship distribution, is a way to take money out of your current 401k while you’re still under age 59½. In general, hardship withdrawals are only allowed for “immediate and heavy” financial needs.

WHAT QUALIFIES AS A HARDSHIP WITHDRAWAL?

There are seven kinds of needs that the IRS says automatically qualify.

• Medical care
• Costs to purchase a primary home
• Expenses for postsecondary education
• Payments needed to avoid eviction or foreclosure
• Funeral expenses
• Repairs of disaster-related damage to the home
• Expenses and loss of income related to a federal disaster declaration

Within these categories, there are specific requirements and details, so make sure you know whether your situation and expenses qualify. Importantly, IRS regulations guide what an employer plan can allow when it comes to hardship withdrawals, but not what it must allow. Just because the IRS says it’s ok doesn’t mean your plan allows it.

WHEN CAN YOU WITHDRAW FROM A 401K?

HOW TO GET APPROVED FOR A HARDSHIP WITHDRAWAL

The best resource for understanding your own hardship withdrawal options is your employer. They’ll know:

• Whether your plan allows hardship distributions at all
• What’s considered a qualifying hardship
• What documentation you need to prove the hardship
• What other options you must exhaust first
• Whether the plan allows the distribution amount to include what’s needed to pay the taxes on the distribution
• Whether there’s a limit on the amount of the distribution or whether only certain kinds of contributions can be withdrawn

Your employer or plan recordkeeper should also be able to help you understand the process of requesting a hardship withdrawal.

It’s really important to note that even if you qualify for a hardship withdrawal and your plan allows you to take one, it doesn’t mean the withdrawal avoids the 10% early withdrawal penalty. The circumstances that allow you to avoid the penalty are dictated by the IRS and although your situation may qualify (specifically in the case of certain medical or disaster recovery expenses), many don’t.

HOW EMERGENCY 401K WITHDRAWALS WORK

An emergency withdrawal is a different type of option recently introduced. As with hardship distributions, plans don’t have to offer it, and it’s much less common because it was introduced only in 2024.

Here are some of the differences:

• An emergency withdrawal can only be for a maximum of $1,000
• You can put the money back within 3 years to reduce the long-term impact
• It always avoids the 10% penalty
• There are no specific rules about what counts as an emergency – the IRS simply says it must be “necessary and unforeseeable,” which you can self-certify

HOW DO 401K LOANS WORK?

Plans can also allow you to take loans from your 401k. While the plan sponsor sets the maximum amount you can borrow, it can’t be more than 50% of your vested balance or $50,000 (whichever is less). You can take a loan for any reason if your plan allows them.

There are no penalties and the money isn’t taxed, but you do have to pay interest on the loan. The plan sponsor sets the interest rate – on the plus side, any interest you pay is placed into your 401k, so you’re paying interest to yourself. (Of course, unless the interest rate is higher than the market returns while the loan is outstanding, you may still wind up with a lower account balance in the long run, because the loaned money is no longer invested.)

You typically repay the loan over a 5-year time frame (longer if the loan is for a home purchase). However, it’s critical to note that:

• If you leave your job (voluntarily or otherwise), you may have to repay the entire loan immediately
• If you’re required to and you don’t, or if you otherwise default at any point, the outstanding loan amount will fall under 401k early withdrawal rules and you’ll likely owe taxes and penalties
• Many plans allow you to take only one loan at a time and there may be a waiting period before you’d be allowed to take another one

TAX IMPLICATIONS TO UNDERSTAND

Aside from the potential 10% early withdrawal penalty, the distribution will also be considered income and subject to income tax at your marginal rate (unless the assets are Roth). It could even push you into a higher tax bracket.

LONG-TERM IMPACT ON YOUR RETIREMENT PLAN

The big downside to withdrawing from your 401k isn’t really the loss of that amount of money for retirement. It’s the fact that the money is no longer invested and won’t have the chance to grow until retirement.

For example, taking $25,000 out of your 401k at age 35 can mean a lower balance of over $250,000 at age 65 (assuming an annual average return of 8%).

Of course, the closer you are to retirement, the less time the money would have had to grow – but you’ll also have less time to try to make up for raiding your savings.

Another way hardship withdrawals can hurt your long-term financial health is by breaking the taboo against dipping into retirement savings. Once you do it, it may start to seem like no big deal.

If you are going to touch your 401k, taking a loan can have less impact, but the opportunity cost is still there. While you do eventually put the money back, it’s not invested in the market while it’s out on loan.

When deciding whether a withdrawal or loan is truly the best option you have, it’s critical to consider your overall financial situation and long-term impacts.

ALTERNATIVES TO TOUCHING YOUR 401K EARLY

The best option for an emergency is to have emergency savings – that’s the whole point of them.

But if you don’t have any or they’re not enough, here are some other options to consider.

• If possible, you may be able to temporarily adjust your budget or cut expenses to redirect funds to the emergency need
• You may be able to negotiate a payment plan or settle for a portion of a debt or bill
• Personal loans or lines of credit (including a home equity loan) could help if you believe the need is short-term and you’ll be able to pay it off over time
• Employer assistance programs or community/government assistance programs could help with specific kinds of needs

Taking a withdrawal or a loan from your 401k might seem like the easiest option (and it could definitely be preferable to ruining your credit, amassing unpayable debt or losing your home), but make sure it’s really necessary. Especially when you’re young, the lost compounding on even a small amount could have a huge impact decades later.

WHEN IT MAY MAKE SENSE TO CONSIDER A HARDSHIP WITHDRAWAL

If you’re in a truly dire situation and don’t have any alternatives that wouldn’t leave you even worse off, a hardship withdrawal can be a lifeline. Scenarios like this might include avoiding eviction or foreclosure, making your home livable or accessing essential medical care.

HOW A FINANCIAL ADVISOR CAN HELP YOU EVALUATE YOUR OPTIONS

When every option comes with tradeoffs, it helps to have someone step back with you and look at the full picture, not just the immediate crisis.

An Edelman Financial Engines advisor can help you understand how a hardship withdrawal, emergency withdrawal or 401k loan might affect your overall financial plan, both now and years down the road. That means comparing the true cost of each option, including taxes, potential penalties and lost investment growth, as well as exploring alternatives you may not have considered.

If accessing retirement savings is unavoidable, your advisor can help you choose the least damaging option for your long‑term goals and make sure you fully understand the rules specific to your employer’s plan. They can also help you plan next steps, whether that’s rebuilding emergency savings, adjusting contributions or reshaping your strategy to keep retirement on track after the disruption.

FREQUENTLY ASKED QUESTIONS

Can I take a hardship withdrawal from my 401k?

Yes, if your plan allows it for your situation and you meet IRS criteria for an immediate and heavy financial need.

Do you have to pay back a 401k hardship withdrawal?

No, hardship withdrawals cannot be repaid.

Do hardship withdrawals avoid penalties?

Some may avoid the 10% early withdrawal penalty if they meet IRS qualifications, but not all – and income taxes still apply.

What proof is needed for a hardship withdrawal?

Documentation varies by plan but may include medical bills, eviction notices or tuition statements.