The share of people taking 401(k) hardship withdrawals rose last year to the highest level ever recorded by Vanguard. The investment firm reports that 6% of plan participants used a hardship withdrawal in 2025, up from 5% in 2024 and 2% in 2020.
“Right now, with gasoline and food prices up, it’s a difficult time,” says Steven Conners, founder and president of Conners Wealth Management in Scottsdale, Arizona.
The latest consumer price index shows annual inflation at 4.2% in May 2026, with gasoline prices up 40.5% from a year earlier and food costs rising 3.1%.
As families struggle to absorb these rising costs, workers may be tempted to dip into their retirement accounts for cash. In the first quarter of 2026, the average 401(k) balance declined 4% compared to the previous quarter, according to Fidelity.
If you need money for an emergency, a hardship withdrawal from your 401(k) account may be an option, but it won’t come cheap, experts caution. For many people, taking a 401(k) loan, using a credit card or tapping home equity may be a better choice.
[Read: When a Retirement Hardship Withdrawal Makes Sense]
How to Take a Hardship Withdrawal
Not every workplace retirement plan allows hardship withdrawals, but for those that do, owners need to follow the hardship withdrawal 401(k) rules for 2026. Rules dictate a hardship distribution can only be taken for an “immediate and heavy financial need,” and distributions are limited to the amount necessary to satisfy that need.
“A hardship withdrawal can only be used for very specific reasons,” says Michael Policar, a financial advisor with NGP Financial Planning in the greater Seattle area.
The IRS allows employers to determine if a worker has an immediate or heavy need based on its plan rules. However, most will automatically consider the following to be a qualifying need.
— Medical expenses
— Purchase of a principal residence
— College and postsecondary education costs, including tuition, fees and room and board
— Payments to avoid eviction or foreclosure
— Funeral expenses
— Repairs to a principal residence
Vanguard says the 401(k) plans it administers use the following methods to qualify workers for a hardship withdrawal.
— 3% allow workers to self-certify that they have a qualifying need, have no alternative source of funds and are only withdrawing the amount needed.
— 87% use a summary service which doesn’t require any upfront documentation from workers but may require information be provided upon request.
— 10% require workers to submit documentation regarding their financial need when requesting a hardship withdrawal.
“If you’re stuck, it’s your money,” Conners says. That makes a hardship withdrawal an appealing way to get needed cash, but he adds, “It really should be under desperate measures.”
Newer Option: $1,000 Penalty-Free 401(k) Withdrawal
The SECURE 2.0 Act of 2022 created a new emergency withdrawal option for 401(k) participants. Emergency withdrawals are capped at $1,000 per calendar year, and participants must retain at least $1,000 in their account after the withdrawal. For example, someone with a balance of $1,750 would only be able to withdraw $750.
No documentation is required to make the withdrawal, and workers have the option to repay the withdrawal directly or use salary deferrals.
“If you don’t pay it back, you can only do a withdrawal every three years,” Policar says.
As with regular hardship distributions, employers aren’t required to offer this option to workers. Unlike regular hardship distributions, these withdrawals are exempt from the 10% early withdrawal penalty that is assessed if a worker is younger than 59 1/2.
[Read: Should You Use Your 401(k) to Pay Off Debt?]
How Much a Hardship Distribution Will Cost You
A hardship distribution comes with both short-term and long-term costs.
Some plans may charge a small administrative fee for processing a hardship withdrawal request. For withdrawals from a traditional 401(k) account, 20% of the distribution will be held for federal income tax. Depending on a person’s tax bracket, more may be due at tax time.
There is also a 10% early withdrawal penalty for workers who are younger than age 59 1/2. This penalty may be waived in certain circumstances, such as if the hardship withdrawal is used to pay medical bills in excess of 7.5% of a person’s adjusted gross income.
Taxes and the early withdrawal penalty could mean that a $10,000 hardship distribution turns into $7,000 or less. However, the short-term costs are only one part of the equation.
“The long-term cost can be significant,” according to Policar. “The pretax compound growth opportunity is gone forever.”
That’s because once money is withdrawn through a regular hardship distribution, it can’t be repaid and won’t gain value in the market. The S&P 500 has had an average annual return of 10% since its inception in 1957, according to Fidelity. Using that rate of return, the chart below illustrates the potential growth a 35-year-old could forgo over a 30-year period by making a hardship withdrawal.
| Hardship Withdrawal Amount | Potential Lost Gains Over 30 Years |
| $5,000 | $87,247 |
| $10,000 | $174,494 |
| $15,000 | $261,741 |
| $20,000 | $348,988 |
“Once you take it, that’s it,” Conners says. “There is no giving it back.”
To avoid losing all those gains, financial experts advise people to consider 401(k) loans or other options first.
401(k) Loan vs. Hardship Withdrawal
A 401(k) loan is another option for workers who need emergency cash. Assuming they are allowed by a plan, loans can be taken for any reason and are limited to $50,000 or the 50% of the account’s vested balance, whichever is less. That is, unless 50% of an account’s vested balance is less than $10,000. In that case, workers can borrow up to $10,000.
Since a 401(k) loan must be repaid, it minimizes the potential lost gains. Loans typically have a five-year repayment period, although if you leave your job, the balance will need to be repaid earlier. Interest on a 401(k) loan is deposited into the worker’s account, making it the equivalent of paying interest to yourself.
“If you take a loan and struggle to pay it back, the loan becomes an early withdrawal,” Policar says.
In that case, taxes and an early withdrawal penalty will apply, but they will generally be calculated on a smaller balance if the borrower has already repaid part of the loan.
[Read: Ways to Avoid 401(k) Fees and Penalties]
Other Options When You Need Cash
Bruce Maginn, partner with Solomon Financial in Carmel, Indiana, encourages people to look beyond their retirement accounts when they need money.
“If they can do almost anything else, it’s going to be better,” he says. Workers might come out ahead financially even if they end up paying interest on a loan.
As an example, Maginn points out that taking $100,000 from a 401(k) could mean losing $1.744 million in gains over 30 years, based on the S&P 500’s average annual return of 10%. If someone took out a $100,000 loan and paid 10% interest while paying it off over 30 years, they would pay a total of $216,000 in interest.
“It’s a good trade to pay $216,000 in interest and get $1.744 million in gains,” Maginn says. “If you get a loan, you are paying interest on a declining amount.” Meanwhile, assets are compounding on a bigger balance.
A home equity loan could be a source of money for homeowners, and those with good credit may be able to get a credit card with an introductory 0% APR. Both may have lower long-term costs than a 401(k) hardship withdrawal.
More from U.S. News
How Much Are 401(k) Early Withdrawal Costs
How to Tell if You Have a Lousy 401(k) Plan
IRA Versus 401(k): Which Is Better?
401(k) Hardship Withdrawals Are at Record Highs: What They Really Cost You originally appeared on usnews.com
