401(k) hardship withdrawals more than double as people raid their retirement savings for emergencies
Hardship withdrawals — which can be taken only for “immediate and heavy financial needs” — have risen in recent years with the rising cost of living. – Getty Images
The high cost of living — with escalated price tags on everything from groceries to housing to healthcare – is hurting people’s everyday lives and forcing them to raid their retirement savings, which only inflicts even more financial pain later.
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.
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.
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.
“I’m not surprised given the cost of living we’ve seen increase in the past five years. Emergencies are always happening. Life has just gotten more expensive,” said Kirsten Hunter-Peterson, vice president of workplace thought leadership at Fidelity Investments. “Everything is just costing a higher amount, and people are needing to take a withdrawal because many people don’t have emergency savings. The problem is that, by the time you retire, you’ve hamstrung your growth.”
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.
There are rules around tapping retirement funds. With hardship withdrawals, an employee has to prove an “immediate and heavy financial need” under Internal Revenue Service rules — 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’re younger than age 59½. The funds also don’t get repaid to the retirement account.
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.
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.
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.
With retirement-plan loans, the employee doesn’t 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.
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 — a permanent balance difference of $66,812 lower, according to Fidelity.
Fidelity said it has found that employees with workplace emergency savings are taking smaller hardship withdrawals, regardless of income level.
Read: Employer-sponsored emergency-savings accounts are becoming a hot perk. Here’s how they work.
“It’s very much helping employees at all levels of income, whether they’re living paycheck to paycheck or [have] higher [income] levels as well,” Hunter-Peterson said.
Among the 75% of employees who say rising costs are a top stressor, half said the stress causes them to feel distracted at work, Fidelity said. Financial stress leads to five to 10 hours of lost productivity per week, causing employers to lose an estimated $183 billion annually in productivity, according to recent data from financial-wellness provider BrightPlan.
The goal for emergency savings is to have three months of essential expenses set aside, Hunter-Peterson said. Other experts suggest an even greater emergency-savings buffer — sometimes as much as 12 months of essential expenses covered. Still, employees with at least three months of emergency savings report financial well-being scores that are two-times higher, Fidelity said.
“Emergency savings is the No. 1 financial goal after retirement,” Hunter-Peterson said. “Adding emergency-savings accounts helps their short-term and long-term financial health.”
