401(k) withdrawals are at a record high. Consider these money-saving options first

A record number of Americans are taking money from their 401(k) plans before retirement, according to a new study from investment firm Vanguard. In 2025, 6% of Vanguard customers with retirement funds initiated a 401(k) hardship withdrawal, up from 5% in 2024 and a pre-pandemic average of 2%.

Hardship withdrawals avoid the usual 10% penalty for touching your retirement account early, provided that the funds are for what the IRS calls "immediate and heavy financial need.”

Vanguard’s How America Saves 2026 report found the most common reasons for tapping a 401(k) in advance were to avoid foreclosure or eviction (36%), to pay medical expenses (31%) and to cover tuition (13%).

Changes to tax laws in recent years also allow you to take up to $1,000 annually for any personal need without incurring the early distribution penalty. If the money is for long-term care insurance, that cap jumps to $2,600.

"Withdrawing from your 401(k) has become one of the easiest ways to access excess capital," Shelby Rothman, founder of L.A.-based EnJoy Financial, told CNBC Select. "Nearly half of Americans don't have $1,000 for unexpected expenses — no emergency fund, no available credit. Nothing." 

Rothman and other financial experts caution against dipping into your nest egg, however, even if you have an approved emergency.

"Retirement accounts are meant to fund decades of future spending, not short-term financial shocks," said Jay Abolofia, founder of Lyon Financial Planning in Waltham, Massachusetts. "When someone takes money out early, they're not just losing the amount withdrawn — they're losing years or decades of compound interest."

With an average annual return of 7%, Rothman said, a worker in their 30s withdrawing $10,000 from their 401(k) could easily be sacrificing $100,000 in potential earnings.

If you dip into your workplace-sponsored retirement account before turning 59½, the IRS usually requires you to pay income taxes on the distribution, as well as a 10% early withdrawal penalty.

Factoring in the penalty and 30% for income tax, a $10,000 withdrawal quickly becomes $6,000. Abolofia doesn’t recommend withdrawing money from your account, but he admits that sometimes it’s necessary.

“If your family is in a bind and you absolutely don't have the cash, just use that money from your 401(k) might the best option, rather than just putting it on a credit card,” he said.

How to get approved for a hardship withdrawal

If your plan permits, the IRS allows penalty-free withdrawals for specific circumstances.

• Avoiding eviction or foreclosure
• Medical expenses
• Tuition and related expenses for higher education
• Buying a primary residence
• Approved home repairs
• Expenses related to federally declared disasters
• Funeral expenses

You're limited to the amount necessary to pay the expense and your employer will determine if you have a qualifying need.

Depending on your plan, you could have to provide proof of your need, including medical bills, eviction notices or home repair estimates. Some plans allow employees to self-certify but you still have to submit a written statement that your debt can't be covered by other means without putting you further in debt.

If approved, you can withdraw contributions or earnings. Matching contributions from an employer are fair game, too.

Households impacted by federally-declared natural disasters can take out up to $22,000, while victims of domestic abuse can withdraw up to $10,000 or 50% of the balance, whichever is less.

If you have a terminal illness (one likely to lead to death within seven years), there's no cap on the amount you can take from your 401(k).

How emergency 401(k) withdrawls work

Since the passage of the SECURE 2.0 Act of 2022, workers with participating 401(k) plans can take up to $1,000 penalty-free. (The money is still taxed as ordinary income.) Beginning in 2026, you can take up to $2,600 annually (adjusted for inflation) to pay for long-term care insurance.

Unlike a hardship withdrawal, emergency withdrawals don't require any proof and can be repaid into your account. If you don't replace the funds within three years, however, you're usually prohibited from making another emergency withdrawal for three more years.

How do 401(k) loans work?

Besides taking money directly from your 401(k), you can borrow against it, usually up to $50,000 or 50% of the vested balance, whichever is less.

With 401(k) loans, there's no credit check or requirement for "immediate and heavy financial need." So long as you keep up with payments, you won't have to pay a penalty or income tax.

And unlike a personal loan or credit card, your interest is credited back to your account — usually at a rate of 1% to 2% above prime.

"You're effectively just paying yourself back," said Abolofia. "The only cost of borrowing from a 401(k) is the potential costs of not being in the market."

There's generally a five-year window to pay off the loans before taxes and penalties apply. If you fail to make at least quarterly payments, the loan is in default, meaning the 10% penalty kicks in and the entire unpaid balance becomes taxable income.

The bigger risk, though, is that the loan is only available if you're still at your job and making active contributions. If you separate from your company for any reason, the full balance is due within 30 to 60 days.

In addition, while your normal 401(k) contributions are pre-taxed, your loan repayments are paid with post-tax dollars. That means when you make withdrawals in retirement, you'll be double-taxed.

Taking from your 401(k) may seem like an easy answer, but there are other options with fewer drawbacks.

Emergency funds

An emergency fund is a standalone account that offers easy access to cash to replace lost income or cover unexpected expenses.

“It's bread-and-butter financial planning,” Abolofia told CNBC Select. “Make sure you're setting aside cash for at least three to six months of living expenses.”

A high-yield savings account is a good place to stash your emergency reserves, since it'll earn a better return than a traditional checking or savings account. It's more accessible than money in a CD or the market, but usually requires extra steps that will keep you from dipping into it to splurge on non-critical expenses.

Unlike some other safety nets, though, an emergency fund requires you to take action before you're laid off or hit with another financial emergency.

Two of our favorite options for an emergency fund are the Lending Club LevelUp Savings Account and the UFB Portfolio Savings Account, neither of which puts a cap on their higher APY.

If working on your own seems unrealistic, SECURE 2.0 allows employees with participating companies to set up automatic contributions of up to $2,500 a year into an Emergency Savings Account.

Unlike a 401(k), you can withdraw from an ESA at any time for any reason without penalties or tax implications. And to incentivize enrollment, employers can offer sign-up bonuses or match ESA contributions.

Workers with ESAs are 50% less likely to withdraw money early from their retirement funds, according to data from the ESA platform SecureSave.

Home equity

If you're a homeowner facing a financial emergency, you can use the equity you've earned on your house to get cash in several ways.

A home equity loan provides a lump sum with fixed rates and set monthly payments, making it a better option for predictable one-time expenses like debt consolidation, a home repair project or college tuition.

A home equity line of credit (HELOC), on the other hand, is more akin to a credit card: You have a revolving line of credit with a variable rate, so you can borrow just what you need during the draw period. Rates are much lower than with a card, though, and you have much longer to pay it back (up to 20 years or longer).

“A HELOC is like having a credit card on your home, and I see a lot of people using that, mostly because it's easy,” Abolofia said. “But it's very expensive. They're variable rates, in line with personal loans. So it’s one of the most expensive ways to borrow.”

And with any home equity product, you're using your home as collateral, so you’re adding the threat of foreclosure if you fall behind on payments.

“I've actually told clients who have HELOCs to actually borrow money from their 401k to pay the HELOC back,” Abolofia added.

IRA withdrawals

Early withdrawals from a traditional independent retirement account (IRA) also come with a 10% penalty and regular income tax. There are several exceptions, including for higher education, medical expenses and up to $10,000 for a first-time home purchase.

If you have a Roth IRA, though, you can withdraw contributions penalty-free. (Touching the earnings will trigger the 10% fine.)

"I recommend taking from your Roth IRA first for almost everyone under 50," Rothman said. "You can always take your principal penalty and tax-free. It's not ideal, but you won't be double hit."

0% APR credit cards

When hit with surprise expenses, many people are tempted to apply for a credit card with a zero-interest introductory offer. Rothman says that's fine — and she's done it herself to pay for appliances — but you need a steady cash flow and know you can pay it off by the time the intro APR ends.

"Credit card debt is a very common reason for early 401(k) withdrawals," she said. "So you could find yourself right back at the beginning. And there are so many other options before it comes to that."

The U.S. Bank Shield™ Visa® Card and Citi® Diamond Preferred® have two of the longest no-interest offers on the market.

While most Americans are worried about outliving their retirement, you can be saving too much for your post-working years — to the point where you don’t have available cash to cover emergencies. 

While hardship withdrawals are at an all-time high, 401(k) balances have also jumped 11% from 2024 to 2025, driven by strong gains in the market. 

“I see a lot of people who are fixated on shoveling lots and lots of money into their retirement accounts,” Abolofia said. “I’m all for saving for retirement, but sometimes it’s too much of a good thing. You should be saving elsewhere so you can adjust when life happens.” 

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