More Americans Are Tapping 401(k)s for emergencies. Here’s When a Hardship Withdrawal Is and Isn’t a Smart Move
More Americans are turning to a 401(k) hardship withdrawal to cover urgent and unexpected expenses. By the end of 2024, about 5% of employees had taken a hardship withdrawal from their 401(k) accounts. That’s more than double the 2% who did so in 2018. With inflation, housing, and healthcare costs rising, Americans are having difficulty saving for emergencies, so they’re finding alternative ways to afford unexpected expenses, including hardship withdrawals from retirement funds. Is this a smart move? Here’s when a hardship withdrawal does and doesn’t make sense.
What Is a 401(k) Hardship Withdrawal?
A hardship withdrawal is money taken out of a 401(k) or traditional IRA for what the IRS deems an “immediate and heavy financial need.” You can pull funds early without incurring the usual 10% early withdrawal penalty as long as the withdrawal meets certain criteria. However, these withdrawals are still subject to standard income taxes. And unlike a 401(k) loan, it can’t be paid back.
Common hardship reasons include:
- Medical expenses
- Funeral costs
- Preventing foreclosure or eviction
- Tuition and educational fees
- Repairing damage to your home from a natural disaster
When a Hardship Withdrawal Might Be the Right Move
A hardship withdrawal can make sense if:
- You’ve exhausted all other options, such as tapping emergency savings or inquiring about payment plans for your hardship
- The expense is time-sensitive and unavoidable
- You’re facing a medical emergency, a foreclosure, or an eviction
- You won’t need to withdraw from your 401(k) again in the foreseeable future
Just be aware that a hardship withdrawal means you’re shrinking your future nest egg, possibly by tens of thousands, depending on the amount you withdraw, your age, and market returns.
When a 401(k) Hardship Withdrawal Is Probably Not Worth It
It’s best to avoid taking a hardship withdrawal for credit card debt, vacations, monthly expense catch-ups, and home upgrades (unless for disaster repairs).
Retirement savings should not be used as a financial band-aid. If you find yourself in the position of contemplating a hardship withdrawal to cover routine expenses and self-incurred debt, it’s time for a budget overhaul.
Also consider that you’re still taxed on the withdrawal, so taking out $10,000 would only mean $7,000 or $8,000 after taxes.
Alternatives to Consider
Before tapping your 401(k), here are some other options to explore:
- A personal loan or home equity loan (as long as the interest rate is reasonable)
- A 401(k) loan. This is not the same as a withdrawal. You repay the loan over time with interest.
- Contact your creditors to set up a payment plan
- Seek help from nonprofit financial counseling services
These options may provide short-term relief without resorting to something as drastic as a 401(k) hardship withdrawal.
