Hardship withdrawals \u2014 which can be taken only for \u201cimmediate and heavy financial needs\u201d \u2014 have risen in recent years with the rising cost of living. – Getty Images <\/p>\n
The high cost of living \u2014 with escalated price tags on everything from groceries to housing to healthcare \u2013 is hurting people\u2019s everyday lives and forcing them to raid their retirement savings, which only inflicts even more financial pain later.<\/p>\n
As more people turn to their 401(k) accounts for hardship withdrawals, workers are jeopardizing their long-term retirement security and their ability to retire on time.<\/p>\n<\/p>\n
Hardship withdrawals have more than doubled in recent years, jumping from 2% in 2018 to 5% in 2024, as workers turn to their 401(k)s for immediate financial needs, Fidelity Investments said. The 5% level was the highest since 2018, when Fidelity started tracking the data.<\/p>\n
As many as 75% of workers cited the rising cost of living as one of their biggest stressors, and nearly said they lack sufficient emergency savings, the investment firm said.<\/p>\n
\u201cI\u2019m not surprised given the cost of living we\u2019ve seen increase in the past five years. Emergencies are always happening. Life has just gotten more expensive,\u201d said Kirsten Hunter-Peterson, vice president of workplace thought leadership at Fidelity Investments. \u201cEverything is just costing a higher amount, and people are needing to take a withdrawal because many people don\u2019t have emergency savings. The problem is that, by the time you retire, you\u2019ve hamstrung your growth.\u201d<\/p>\n
The increase in hardship withdrawals comes as inflation averaged 4.2% for the five years ending in 2024. The annual inflation rate was about 3% as of September 2025.<\/p>\n
There are rules around tapping retirement funds. With hardship withdrawals, an employee has to prove an \u201cimmediate and heavy financial need\u201d under Internal Revenue Service rules \u2014 such as funds to avoid eviction or foreclosure, receive medical care, and pay for funeral expenses or tuition. Hardship withdrawals are taxed as ordinary income, and the employee pays a 10% penalty if they\u2019re younger than age 59\u00bd. The funds also don\u2019t get repaid to the retirement account.<\/p>\n
Hardship withdrawals can only be made for the amount necessary to meet the financial need, per IRS rules. Employees without emergency savings are twice as likely to turn to their retirement funds for loans or withdrawals, Fidelity said.<\/p>\n
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Retirement-plan loans also have been on the rise since 2021, Fidelity noted. The share of workers with outstanding loans on their Fidelity 401(k) accounts increased in the second quarter to 19%, up from 18.3% a year earlier, the investment firm said.<\/p>\n
Loans can be for up to 50% of your vested account balance or $50,000, whichever is less. An exception to this limit is if 50% of the vested account balance is less than $10,000; in that case, the participant may borrow up to $10,000. The loan amount also gets repaid with interest. Not all employers allow loans from their 401(k) plans.<\/p>\n
With retirement-plan loans, the employee doesn\u2019t have to disclose the reason for taking the money out. The money gets repaid with interest and the hiccup to the retirement account is nominal, Hunter-Peterson said. However, the hit from a withdrawal is sizable.<\/p>\n
For example, if you have a balance of $38,000 at age 45 and take a $15,000 hardship withdrawal, you would have a more hefty hit to your account balance at age 67 than if you took a loan that you repaid. Your balance at age 67 would be $362,913 with a withdrawal, taxes and penalties, versus a balance of $429,725 with a loan repaid with interest \u2014 a permanent balance difference of $66,812 lower, according to Fidelity.<\/p>\n
Fidelity said it has found that employees with workplace emergency savings<\/a> are taking smaller hardship withdrawals, regardless of income level.<\/p>\n