SCOTTSDALE — Vanguard reported that 6% of plan participants utilized a 401(k) hardship withdrawal in 2025, up from 5% in 2024 and 2% in 2020.

Hardship withdrawals are subject to Internal Revenue Service regulations that permit such distributions only for an immediate and heavy financial need and limit them to the exact amount necessary to satisfy that need. Qualifying needs typically include medical expenses, home purchases, education costs, eviction or foreclosure prevention, funeral expenses, and home repairs.

Michael Policar, a financial advisor with NGP Financial Planning, said, "A hardship withdrawal can only be used for very specific reasons." Steven Conners, founder and president of Conners Wealth Management, said, "It really should be under desperate measures."

Consumer costs have risen alongside hardship withdrawal rates. The consumer price index showed annual inflation at 4.2% in May 2026. From May 2025 to May 2026, gasoline prices increased by 40.5% and food costs increased by 3.1%. Conners said, "Right now, with gasoline and food prices up, it's a difficult time."

Hardship withdrawals carry financial consequences. Twenty percent of a traditional 401(k) hardship distribution is withheld for federal income tax. A 10% early withdrawal penalty applies to workers younger than 59 1/2, though this penalty may be waived if funds are used for medical expenses exceeding 7.5% of adjusted gross income. Conners said, "Once you take it, that's it."

Regarding documentation, 87% of Vanguard-administered 401(k) plans use a summary service that does not require upfront documentation for hardship withdrawals, while 10% require workers to submit documentation.

The SECURE 2.0 Act of 2022 introduced a $1,000 annual emergency withdrawal option for 401(k) participants. This option does not require documentation, and participants must maintain a minimum balance of $1,000 after making such a withdrawal. Workers can repay a SECURE 2.0 emergency withdrawal directly or through salary deferrals. Policar said, "If you don't pay it back, you can only do a withdrawal every three years." These emergency withdrawals are exempt from the 10% early withdrawal penalty for account holders under age 59 1/2.

Another option is a 401(k) loan, which plans may permit for any reason. These loans are typically capped at $50,000 or 50% of the vested account balance, whichever is less. Repayment is generally required within five years, and the interest paid is deposited back into the borrower's retirement account. Unpaid loan balances become taxed as early withdrawals and incur penalties if an employee leaves their employer or defaults. Bruce Maginn, a partner with Solomon Financial, said, "If they can do almost anything else, it's going to be better."