Do this before you make a 401(k) hardship withdrawal

When tax attorney Andrew Gradman thinks about 401(k) hardship withdrawals, he thinks of Puccini.

In the opening scene of the opera “La Boheme,” struggling artists Marcello and Rodolfo keep warm by burning pages from Rodolfo’s latest poem. 

When people tap their retirement accounts early, a similar — though less dire — calculation is taking place. They’re burning retirement dollars that come with penalties, taxes and lost growth.

But under specific, limited circumstances — ideally before you’re in danger of freezing to death — a 401(k) hardship withdrawal can be the right move.

A record number of Americans made that calculation for themselves in 2025, according to a new report from Vanguard. Six percent of their retirement plan participants initiated a hardship withdrawal last year, up 20% from 2024, and a record high overall.

It wasn’t all bad news, said David Stinnett, Vanguard’s Head of Strategic Retirement Consulting. Account balances increased by an average of 13%. The average plan participant had $167,970 in their account at the end of 2025, with a median balance of $44,115. 

Stinnett credited automatic 401(k) enrollment and automated annual increases with boosting workers’ retirement savings, in addition to overall market performance. Many workplaces are introducing financial wellness programs to help employees understand their options, which can further enhance participation, he said.

• Got money questions? Here’s how to send them to our California budgeting advice columnist

Lower-compensated workers were more likely to tap 401(k)s for hardship withdrawals, Stinnett said. The average withdrawal amount was $1,900, which is not nothing, but not an indicator that many people are fully cashing out their accounts.

How do hardship withdrawals work, and why are people using them more often? When are they a good choice, and what alternatives are there? Here’s what financial experts think.

A 401(k) hardship withdrawal is when you take money from your 401(k) account to pay for an urgent expense. You have to prove to your plan administrator that you have what the IRS calls an “immediate and heavy need,” and you can only withdraw the amount needed to pay for it.

The IRS has a list of the types of need that qualify: They include payments to prevent eviction or foreclosure on your primary residence; repairs for damage to that residence; expenses related to a FEMA-declared disaster; or to pay certain medical, education or funeral costs for yourself, your spouse, your plan beneficiaries or dependents. 

Qualified hardship distributions are slightly different from early withdrawals. If you just want to take money from your 401(k) before you’re 59½, you can, but it will hurt: You’ll pay a 10% federal penalty and a 2.5% California penalty. And then you have to pay federal and state income taxes on it. So you take a big haircut.

Hardship withdrawals, on the other hand, don’t always face those same penalties — you’re not subject to the 10% additional tax if you qualify separately for an IRS exception. You do have to pay state and federal taxes on them, though. 

• Read: Is taking an early withdrawal from a 401(k) really so bad?

• Read: The 401(k) milestones everyone should hit ASAP — and next steps to take once you pass them

SECURE 2.0 — legislation passed under the Biden administration in 2022 — streamlined how hardship withdrawals can be qualified, Stinnett said. There used to be more paperwork involved, but now plan participants may be able to self-certify with less documentation.

2025 saw new record highs for the stock market. But economic headwinds blew the other way for a large swath of Americans. California employers announced more than 173,000 job cuts between January and November of last year, including thousands at Bay Area tech firms like Salesforce, Meta and HP. As companies in the AI space fought to lure top engineers, California saw its overall unemployment rate hit 5.5% at the end of the year, well above the national rate of 4.4%.

Most 401(k) plans don’t allow you to take a hardship withdrawal after you’ve been laid off or fired. But if you’re still employed and a spouse or roommate gets laid off, a hardship withdrawal can help bridge the gap to prevent things like foreclosure or eviction, or pay urgent medical bills. (If you have lost your job, you are likely eligible for what’s called a severance distribution, which isn’t the same thing as a hardship withdrawal.)

Tariffs, elevated inflation and rising housing costs further pinched household budgets, putting many people living paycheck-to-paycheck in a position where needs exceeded resources.

The rise in hardship withdrawal rates and the fact that more lower-income people are taking them are continued signs of the so-called “K-shaped economy.” If you look at the letter K, the upper arm rises and the lower arm points downward. Think of those as the “haves and have nots” of today’s economy: People with higher incomes and wealth levels are seeing their fortunes grow, while others are in worse financial shape compared to a few years ago.

When should you seek a qualified hardship withdrawal? Gradman’s topline advice when people ask him about taking any sort of early distribution from their retirement accounts is “don’t.” You’re missing out on a major opportunity cost. $1,900 isn’t that much money right now, but if you take that out at, say, age 35, typical market returns indicate you’ll have about $12,000 less in your retirement account at age 67.

“You’re stealing from your future self,” he said. It should be a moment when you’ve exhausted your other options. 

But your retirement savings should absolutely serve as a backstop against financial oblivion, and paying for medical treatment and preventing an eviction are worthy uses of it. 

If you do need to take one or two hardship withdrawals over the course of your career, “that’s not going to meaningfully set back your long-term objective” of saving for retirement, Stinnett said. “On the other hand, it’s important to start saving for emergency savings needs.”

The best alternative to taking money from your 401(k) is to use your emergency fund first. There’s a lot of focus in personal finance writing on building an e-fund, though not always a ton of guidance on how and when to use it.

• Read: You’ve built your emergency fund. Here’s what to do when you need to use it

• Read: The ultimate guide to making a household budget

Of course, “just use the money that’s already in your bank account!” will ring pretty hollow to the roughly one-third of Americans who couldn’t pay cash for a $400 emergency, said Amanda Henry, the author of “The Financial Abundance Blueprint.” If you have money in a taxable brokerage, you can withdraw those funds without paying the same penalties as a 401(k) withdrawal, though that might feel unpalatable when the market is down.

Tech people in the Bay Area likely “get some sort of equity or company stock as part of our compensation,” said Henry, who previously worked for Google. “You’d be surprised how many folks forget to actually leverage that as a resource. You don’t have to receive your Meta stock or your Amazon stock and let it sit there.”

Other ideas include working out payment plans with credit card companies or utility companies — many have hardship programs, but you have to call and ask to find out about them — and talking to nonprofit credit counseling organizations.

If you do need to access the money in your 401(k), taking a loan against it might be a smart move: You’ll typically pay interest at the prime rate (currently 6.75%) plus another 1% to 2%, which is lower than a lot of other loan and credit options out there. And usually, both the principal and interest go back to you. 

There are some caveats. You’re limited to how much you can take out, typically some percentage of your balance. You miss out on market growth for the principal as you pay it back. And if you are laid off or fired, you probably have a tight window to pay back the entire balance, and can be subject to early distribution penalties if you aren’t able to.

If you’re still actively contributing to your 401(k), pausing or lowering those contributions could be another short-term way to fund your expenses, though you’ll have to think through the impact of potentially missing out on your employer match.

Once the financial winter has passed, make a plan to get back to basics: Make a budget. Set aside a little cash for emergencies. Live like you don’t want anyone to write a tragic opera about your finances.