A record number of Americans are taking money from their 401(k) plans before retirement, according to a new study from investment firm Vanguard. In 2025, 6% of Vanguard customers with retirement funds initiated a 401(k) hardship withdrawal, up from 5% in 2024 and a pre-pandemic average of 2%.
Hardship withdrawals avoid the usual 10% penalty for touching your retirement account early, provided that the funds are for what the IRS calls “immediate and heavy financial need.”
Vanguard’s How America Saves 2026 report found the most common reasons for tapping a 401(k) in advance were to avoid foreclosure or eviction (36%), to pay medical expenses (31%) and to cover tuition (13%).
Changes to tax laws in recent years also allow you to take up to $1,000 annually for any personal need without incurring the early distribution penalty. If the money is for long-term care insurance, that cap jumps to $2,600.
“Withdrawing from your 401(k) has become one of the easiest ways to access excess capital,” Shelby Rothman, founder of L.A.-based EnJoy Financial, told CNBC Select. “Nearly half of Americans don’t have $1,000 for unexpected expenses — no emergency fund, no available credit. Nothing.”
See if debt relief is the right option for you
Rothman and other financial experts caution against dipping into your nest egg, however, even if you have an approved emergency.
“Retirement accounts are meant to fund decades of future spending, not short-term financial shocks,” said Jay Abolofia, founder of Lyon Financial Planning in Waltham, Massachusetts. “When someone takes money out early, they’re not just losing the amount withdrawn — they’re losing years or decades of compound interest.”
With an average annual return of 7%, Rothman said, a worker in their 30s withdrawing $10,000 from their 401(k) could easily be sacrificing $100,000 in potential earnings.
When can you withdraw from a 401(k)?
If you dip into your workplace-sponsored retirement account before turning 59½, the IRS usually requires you to pay income taxes on the distribution, as well as a 10% early withdrawal penalty.
Factoring in the penalty and 30% for income tax, a $10,000 withdrawal quickly becomes $6,000. Abolofia doesn’t recommend withdrawing money from your account, but he admits that sometimes it’s necessary.
“If your family is in a bind and you absolutely don’t have the cash, just use that money from your 401(k) might the best option, rather than just putting it on a credit card,” he said.
How to get approved for a hardship withdrawal
If your plan permits, the IRS allows penalty-free withdrawals for specific circumstances.
Avoiding eviction or foreclosureMedical expensesTuition and related expenses for higher educationBuying a primary residenceApproved home repairsExpenses related to federally declared disastersFuneral expenses
You’re limited to the amount necessary to pay the expense and your employer will determine if you have a qualifying need.
Depending on your plan, you could have to provide proof of your need, including medical bills, eviction notices or home repair estimates. Some plans allow employees to self-certify but you still have to submit a written statement that your debt can’t be covered by other means without putting you further in debt.
If approved, you can withdraw contributions or earnings. Matching contributions from an employer are fair game, too.
Households impacted by federally-declared natural disasters can take out up to $22,000, while victims of domestic abuse can withdraw up to $10,000 or 50% of the balance, whichever is less.
If you have a terminal illness (one likely to lead to death within seven years), there’s no cap on the amount you can take from your 401(k).
How emergency 401(k) withdrawls work
Since the passage of the SECURE 2.0 Act of 2022, workers with participating 401(k) plans can take up to $1,000 penalty-free. (The money is still taxed as ordinary income.) Beginning in 2026, you can take up to $2,600 annually (adjusted for inflation) to pay for long-term care insurance.
Unlike a hardship withdrawal, emergency withdrawals don’t require any proof and can be repaid into your account. If you don’t replace the funds within three years, however, you’re usually prohibited from making another emergency withdrawal for three more years.
How do 401(k) loans work?
Besides taking money directly from your 401(k), you can borrow against it, usually up to $50,000 or 50% of the vested balance, whichever is less.
With 401(k) loans, there’s no credit check or requirement for “immediate and heavy financial need.” So long as you keep up with payments, you won’t have to pay a penalty or income tax.
And unlike a personal loan or credit card, your interest is credited back to your account — usually at a rate of 1% to 2% above prime.
“You’re effectively just paying yourself back,” said Abolofia. “The only cost of borrowing from a 401(k) is the potential costs of not being in the market.”
There’s generally a five-year window to pay off the loans before taxes and penalties apply. If you fail to make at least quarterly payments, the loan is in default, meaning the 10% penalty kicks in and the entire unpaid balance becomes taxable income.
The bigger risk, though, is that the loan is only available if you’re still at your job and making active contributions. If you separate from your company for any reason, the full balance is due within 30 to 60 days.
In addition, while your normal 401(k) contributions are pre-taxed, your loan repayments are paid with post-tax dollars. That means when you make withdrawals in retirement, you’ll be double-taxed.
Alternatives to touching your 401(k) early
Taking from your 401(k) may seem like an easy answer, but there are other options with fewer drawbacks.
Emergency funds
An emergency fund is a standalone account that offers easy access to cash to replace lost income or cover unexpected expenses.
“It’s bread-and-butter financial planning,” Abolofia told CNBC Select. “Make sure you’re setting aside cash for at least three to six months of living expenses.”
A high-yield savings account is a good place to stash your emergency reserves, since it’ll earn a better return than a traditional checking or savings account. It’s more accessible than money in a CD or the market, but usually requires extra steps that will keep you from dipping into it to splurge on non-critical expenses.
Unlike some other safety nets, though, an emergency fund requires you to take action before you’re laid off or hit with another financial emergency.
Two of our favorite options for an emergency fund are the Lending Club LevelUp Savings Account and the UFB Portfolio Savings Account, neither of which puts a cap on their higher APY.
LendingClub LevelUp Savings Account
LendingClub Bank, N.A., Member FDIC
Annual Percentage Yield (APY)
4.20% (with monthly deposits of at least $250), or 3.20%
Minimum balanceMonthly feeMaximum transactionsExcessive transactions feeOverdraft feesOffer checking account?Offer ATM card?
UFB Portfolio Savings offered by Axos Bank®, a Member FDIC.
UFB Portfolio Savings offered by Axos Bank®, a Member FDIC.
Annual Percentage Yield (APY)
$0, no minimum deposit or balance needed for savings
No monthly maintenance or service fees
Overdraft fees may be charged, according to the terms; overdraft protection available
If working on your own seems unrealistic, SECURE 2.0 allows employees with participating companies to set up automatic contributions of up to $2,500 a year into an Emergency Savings Account.
Unlike a 401(k), you can withdraw from an ESA at any time for any reason without penalties or tax implications. And to incentivize enrollment, employers can offer sign-up bonuses or match ESA contributions.
Workers with ESAs are 50% less likely to withdraw money early from their retirement funds, according to data from the ESA platform SecureSave.
Home equity
If you’re a homeowner facing a financial emergency, you can use the equity you’ve earned on your house to get cash in several ways.
A home equity loan provides a lump sum with fixed rates and set monthly payments, making it a better option for predictable one-time expenses like debt consolidation, a home repair project or college tuition.
A home equity line of credit (HELOC), on the other hand, is more akin to a credit card: You have a revolving line of credit with a variable rate, so you can borrow just what you need during the draw period. Rates are much lower than with a card, though, and you have much longer to pay it back (up to 20 years or longer).
“A HELOC is like having a credit card on your home, and I see a lot of people using that, mostly because it’s easy,” Abolofia said. “But it’s very expensive. They’re variable rates, in line with personal loans. So it’s one of the most expensive ways to borrow.”
And with any home equity product, you’re using your home as collateral, so you’re adding the threat of foreclosure if you fall behind on payments.
“I’ve actually told clients who have HELOCs to actually borrow money from their 401k to pay the HELOC back,” Abolofia added.
IRA withdrawals
Early withdrawals from a traditional independent retirement account (IRA) also come with a 10% penalty and regular income tax. There are several exceptions, including for higher education, medical expenses and up to $10,000 for a first-time home purchase.
If you have a Roth IRA, though, you can withdraw contributions penalty-free. (Touching the earnings will trigger the 10% fine.)
“I recommend taking from your Roth IRA first for almost everyone under 50,” Rothman said. “You can always take your principal penalty and tax-free. It’s not ideal, but you won’t be double hit.”
0% APR credit cards
When hit with surprise expenses, many people are tempted to apply for a credit card with a zero-interest introductory offer. Rothman says that’s fine — and she’s done it herself to pay for appliances — but you need a steady cash flow and know you can pay it off by the time the intro APR ends.
“Credit card debt is a very common reason for early 401(k) withdrawals,” she said. “So you could find yourself right back at the beginning. And there are so many other options before it comes to that.”
The U.S. Bank Shield™ Visa® Card and Citi® Diamond Preferred® have two of the longest no-interest offers on the market.
Receive a 0% Intro APR for 21 months on balance transfers and for 12 months on purchases.
Good to Excellent670–850
Our expert take
The Citi® Diamond Preferred® Card is one of the best balance transfer credit cards and also has a generous intro APR offer.
Pros & consOne of the longest intro-APR offers for balance transfersNo annual feeNo rewardsNo welcome bonusMore detailsHighlights
Highlights shown here are provided by the issuer and have not been reviewed by CNBC Select’s editorial staff.
0% Intro APR on balance transfers for 21 months and on purchases for 12 months from date of account opening. After that the variable APR will be 16.49% – 27.24%, based on your creditworthiness. Balance transfers must be completed within 4 months of account opening.There is a balance transfer fee of either $5 or 5% of the amount of each transfer, whichever is greaterGet free access to your FICO® Score online.With Citi Entertainment®, get special access to purchase tickets to thousands of events, including concerts, sporting events, dining experiences and more.No Annual Fee – our low intro rates and all the benefits don’t come with a yearly charge.Balance transfer fee
Balance transfer fee applies with this offer 5% of each balance transfer; $5 minimum.
Information about the U.S. Bank Shield™ Visa® Card has been collected independently by CNBC Select and has not been reviewed or provided by the issuer prior to publication.
Information about the U.S. Bank Shield™ Visa® Card has been collected independently by CNBC Select and has not been reviewed or provided by the issuer prior to publication.
Good to Excellent670–850
*See rates and fees, terms apply.
Pros & consBest-in-class intro-APR offers for purchases and balance transfersNo annual feeAnnual statement creditCell phone protectionRewards limited to eligible travel purchases made through the U.S. Bank Rewards CenterNo welcome bonusHas a foreign transaction feeNo intro balance transfer feeAre you saving too much for retirement?
While most Americans are worried about outliving their retirement, you can be saving too much for your post-working years — to the point where you don’t have available cash to cover emergencies.
While hardship withdrawals are at an all-time high, 401(k) balances have also jumped 11% from 2024 to 2025, driven by strong gains in the market.
“I see a lot of people who are fixated on shoveling lots and lots of money into their retirement accounts,” Abolofia said. “I’m all for saving for retirement, but sometimes it’s too much of a good thing. You should be saving elsewhere so you can adjust when life happens.”
FAQs
When can you withdraw from a 401(k)?
You can withdraw from your 401(k) at any time, but if it’s before you turn 59½, you’ll have to pay a 10% penalty and be charged income tax on the distribution. There are several exceptions, family for financial emergencies like to avoid foreclosure/eviction, to cover medical bills and to pay tuition.
How does a 401(k) loan work?
A 401(k) loan lets you borrow from your retirement account without being hit with a 10% penalty, so long as you repay the loan within five years. The interest you pay goes back into your 401(k), but you’ll miss out on the potential earnings you would have enjoyed if you left the funds alone.
How do I withdraw from a 401(k) early?
Whether it’s just an early withdrawal, a 401(k) loan, an emergency withdrawal or a hardship withdrawal, you’ll have to work with your plan administrator. If you’re making a hardship withdrawal, you may need to provide some documentation about the nature of your financial hardship.
At CNBC Select, our mission is to deliver high-quality service journalism and comprehensive consumer advice to our readers, enabling them to make informed financial decisions. Every car insurance review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of insurance products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content independently of our commercial team and any outside third parties, and we pride ourselves on maintaining high journalistic standards and ethics.
Subscribe to the CNBC Select Newsletter!
Money matters — so make the most of it. Get expert tips, strategies, news and everything else you need to maximize your money, right to your inbox. Sign up here.
* Information about the U.S. Bank Shield™ Visa® Card has been collected independently by CNBC Select and has not been reviewed or provided by the issuer of the card prior to publication.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.