Retirement accounts are supposed to be long-term savings vehicles, but for a growing number of Americans, they’re becoming an emergency lifeline.
When bills pile up, housing payments fall behind or medical costs suddenly enter the picture, some workers turn to the largest pool of money they have, which is their 401(k).
That safety valve is being used more than ever. New data from Vanguard shows a record 6% of workers in its 401(k) plans took hardship withdrawals last year, up from 5% the year before (1).
While many Americans are saving more and benefiting from the stock market, yet another segment of the workforce is facing mounting financial strain from housing costs, debt and unexpected expenses.
For those workers, retirement accounts can become the only accessible source of cash.
The most common reasons workers withdraw money early are urgent financial problems, particularly avoiding eviction or foreclosure and paying medical bills.
The typical hardship withdrawal remains relatively modest. Vanguard reports the median withdrawal was about $1,900, suggesting many people are plugging short-term financial gaps. However, nearly half (46%) of those who made a hardship withdrawal took more than one throughout the year, while 21% took three or more.
Hardship withdrawal rates have been rising since 2020, Vanguard reports, and several factors may be driving the increase. Congress made hardship withdrawals easier in 2018 by removing a rule requiring workers to take out a 401(k) loan first. More recent legislation expanded the list of situations that qualify for withdrawals.
Another driver could simply be that more Americans have retirement accounts to begin with. Automatic enrollment programs have dramatically increased participation in workplace retirement plans. Among employers using Vanguard’s administration services, 61% automatically enrolled new hires in 2025, compared with about one-third of plans in 2013, according to The Wall Street Journal (2).
That means more workers have retirement savings, so more accounts that can be tapped when financial trouble strikes.
“With more sponsors auto-enrolling workers, people saving at higher rates, they’re building meaningful balances, and so they have retirement assets available if a financial shock occurs,” Jeff Clark, Vanguard’s head of defined contribution research, told CBS News MoneyWatch (3). “It’s inadvertently providing a financial safety net because if they hadn’t been auto-enrolled, they might not have had those assets to tap into for an emergency.”
Although not considered a hardship withdrawal, workers are now also allowed to make penalty-free withdrawals up to $1,000 for emergencies once every three years, or once per year if you pay the money back, provided certain conditions are met.
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Pulling money from a retirement account may solve a short-term crisis, but it often carries lasting financial consequences.
For starters, withdrawals from traditional 401(k) plans are usually treated as taxable income. If the account holder is younger than 59½, the IRS typically adds a 10% early withdrawal penalty on top of the income taxes owed. Some hardship withdrawals, however, may be exempt from the 10% penalty.
But taxes and penalties are only part of the damage. Money removed from a retirement account can lose years of potential investment growth. Even a relatively small withdrawal can significantly shrink a future nest egg due to lost compounding.
Occasional hardship withdrawals may not derail someone’s retirement plan entirely. But using a 401(k) repeatedly as a financial backstop can become a serious problem. Workers who take money out regularly often fall behind on contributions, lose employer matching funds and reduce the amount invested for the future.
Financial planners generally consider retirement accounts a last-resort option for emergencies.
One of the best protections is building an emergency fund that can cover three to six months of expenses. That cushion can help workers avoid tapping their retirement accounts when unexpected costs arise.
Another strategy is to adjust spending or temporarily lower retirement contributions during difficult periods rather than withdrawing money entirely. Reducing contributions for a short time may slow progress toward retirement goals, but it can potentially cause far less long-term damage than withdrawing money from the account.
Workers facing immediate financial pressure may also have alternatives such as payment plans with medical providers, nonprofit credit counseling services or temporary assistance programs for housing or utilities.
If a withdrawal from a 401(k) becomes unavoidable, it’s advisable to take only the amount you need and draft a plan to rebuild your savings once your finances stabilize.
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Vanguard (1); The Wall Street Journal (2); CBS News MoneyWatch (3)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
