Vanguard finds more Americans are treating their 401(k)s like emergency funds — here’s what to consider before making a hardship withdrawal

Why are more Americans tapping into their 401(k)?

In 2024, 401(k) hardship withdrawal rules changed in accordance with the Securing a Strong Retirement Act of 2022 (SECURE 2.0).

“Given that it’s now easier to request a hardship withdrawal and that automatic enrollment is helping more workers save for retirement, especially lower-income workers, a modest increase isn’t surprising,” noted the Vanguard report.

Overall, despite a “few signals of a possible uptick in financial stress,” the report noted that participants are “generally resilient” and “maintain a long-term approach to retirement saving.”

That could be, in part, because of the growing adoption of automatic enrolment (where contributions are automatically deducted from your paycheck) and the growing use of professionally managed allocations, which has helped to increase savings while improving “age-appropriate equity exposure.”

However, these numbers reflect the economic trends of 2024, including real GDP growth, moderating inflation and low unemployment, along with strong consumer spending — though household debt continued to rise during the year.

But the economic outlook isn't an sunny in 2025, with analysts lowering their GDP forecast for 2025 and raising the probability of a recession.

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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What you need to know about hardship withdrawals

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.