A report from Vanguard in 2026 highlights that a record 6% of 401(k) participants withdrew funds from their accounts for financial hardships in 2025. This marks a steady increase from 4.8% in 2024 and 3.6% in 2023. While having access to these funds can serve as an important safety net, withdrawals should generally be considered a last resort.
Why a Hardship Withdrawal Can Be Costly
One of the major drawbacks of a hardship withdrawal is its long-term impact on your retirement security. Unlike a 401(k) loan, a hardship withdrawal typically does not allow for repayment. Once the money is taken out, you cannot return it, leading to a permanent loss of tax-deferred growth.
That can have a lasting effect. Even a modest withdrawal today could mean significantly less in retirement later because of lost compounded returns.
When a 401(k) Hardship Withdrawal May Be Allowed
To qualify, the IRS mandates that a participant must prove an “immediate and heavy financial need.” Most plans utilize “Safe Harbor” provisions, which generally means that certain expenses are automatically considered to meet that standard, provided the participant does not have another available source of funds to cover the need. These expenses may include:
- Medical Expenses: Unreimbursed costs for the participant, spouse, or dependents.
- Eviction/Foreclosure: Funds to prevent the loss of a primary residence.
- Primary Residence Repairs: Costs resulting from casualty losses, such as FEMA-declared disasters.
- Funeral Expenses: Burial or funeral costs for family members or beneficiaries.
- Primary Home Purchase: Costs for a down payment or closing costs (excluding mortgage payments).
- Educational Expenses: Tuition and related fees for the next 12 months of post-secondary education.
Taxes and Penalties to Consider
Because 401(k) contributions are typically made pre-tax, hardship withdrawals are taxable as ordinary income. If you are under 59½ years of age, your withdrawal may also be subject to a 10% early withdrawal penalty.
Recent legislative updates, such as the SECURE 2.0 Act, have introduced a small measure of flexibility, allowing participants to take one “emergency personal expense” withdrawal of up to $1,000 per year penalty-free. Additionally, unlike traditional hardship withdrawals, this $1,000 can be repaid within three years to restore the account’s balance. However, this option should still be evaluated carefully.
Consider Other Options First
If you are facing financial strain, it may make sense to explore other available resources before using retirement savings. Depending on your situation, that could include emergency savings, payment plans, insurance coverage, or other sources of short-term support.
While 401(k) hardship withdrawals may help address an immediate need, they can also come with long-term tradeoffs. Before taking money from your retirement account, make sure you understand the rules, tax consequences, and impact on your future financial security.
For more helpful content delivered directly to your inbox, sign up for our newsletter at the bottom of the page.
Marshall Clay CFP, J.D., is a Partner and Senior Advisor at The Welch Group, LLC, specializing in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™. In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by The Welch Group, LLC [“Welch”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, no portion of this discussion or information serves as the receipt of, or a substitute for, personalized investment advice from Welch contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Welch To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Neither Welch’s investment adviser registration status, nor any amount of prior experience or success, should be construed that a certain level of results or satisfaction will be achieved if Welch is engaged, or continues to be engaged, to provide investment advisory services. Welch is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Welch’s current written disclosure Brochure and Form CRS discussing our advisory services and fees is available for review upon request or at www.welchgroup.com. Please Note: Welch does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Welch’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a Welch client, please contact Welch, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.
IMPORTANT VIDEO DISCLOSURE INFORMATION
The video segment by The Welch Group, LLC (“Welch) was intended for general information purposes only. No portion of the video serves as the receipt of, or as a substitute for, personalized investment advice from Welch or any other investment professional of your choosing. Different types of investments involve varying degrees of risk, and it should not be assumed that future performance of any specific investment or investment strategy, or any non-investment related or planning services, discussion or content, will be profitable, be suitable for your portfolio or individual situation, or prove successful. Neither Welch’s investment adviser registration status, nor any amount of prior experience or success, should be construed that a certain level of results or satisfaction will be achieved if Welch is engaged, or continues to be engaged, to provide investment advisory services. Welch is neither a law firm nor accounting firm, and no portion of its services should be construed as legal or accounting advice. No portion of the video content should be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Welch is engaged, or continues to be engaged, to provide investment advisory services. Copies of Welch’s current written disclosure Brochure and Form CRS discussing our advisory services and fees are available upon request or at www.welchgroup.com.