Record Number of Americans Tapping Their 401(k) Early, According To New Study
More Americans are tapping their 401(k)s to cover short-term expenses.
A recent Vanguard report found that 6% of 401(k) participants took a hardship withdrawal in 2025, up from 5% in 2024, continuing a gradual rise. For some, it comes down to unexpected costs like medical bills, repairs or gaps in income that don’t leave much room to maneuver.
But the cost of withdrawing from your 401(k) isn’t always obvious right away. And there may be other options worth considering first.
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The penalty is only part of it
Taking money out of a 401(k) before age 59½ typically triggers income taxes plus a 10% early withdrawal penalty. The longer-term hit is harder to see.
“In your 50s, dipping into your 401(k) should be your last resort,” said Brian Colvert, CEO and CFP at Bonfire Financial. “A $25,000 withdrawal at 55 can easily cost $80,000 or more in lost future value. Unless it’s preventing something like foreclosure or a major medical issue, it’s usually a sign something else in the plan needs to be fixed.” In other words, the withdrawal is usually a symptom of a gap somewhere else in the long-term financial plan, not the problem itself.
Taking $10,000 out of a retirement account in your 40s cuts off years of compounding growth. Depending on market returns, that money could have doubled or tripled by retirement. And once you start treating retirement savings as a fallback, that pattern gets harder to reverse each time.
What to consider before making a withdrawal
People may have more options than they realize before touching a 401(k), and most of them are significantly cheaper than an early distribution.
“First, exhaust non-retirement assets: taxable brokerage accounts, savings, or a HELOC won’t trigger ordinary income tax or the 10% early withdrawal penalty,” said Gary Watts, CFP and founder of Watts Advisors. “If retirement funds are truly needed, a 401(k) loan is usually the best first move. Most plans allow borrowing up to 50% of the vested balance, up to $50,000, with repayment over five years and no tax event as long as the loan stays current.”
Other options worth considering include negotiating a payment plan on the bill itself or temporarily cutting expenses to free up cash flow.
“In your 50s, dipping into your 401(k) should be your last resort. A $25,000 withdrawal at 55 can easily cost $80,000 or more in lost future value.”
Brian Colvert, CEO and CFP at Bonfire Financial.
Options that often get overlooked
Two alternatives worth knowing about, particularly for people in their 50s, are the Rule of 55 and the governmental 457(b).
If you’ve left your job at age 55 or older, the IRS allows penalty-free withdrawals from that employer’s 401(k) with no special repayment structure required. This is commonly known as the Rule of 55. The withdrawals are still taxable as ordinary income, but the 10% penalty doesn’t apply.
The governmental 457(b), available to many state and local government employees, works a little differently. Unlike the Rule of 55, there’s no age requirement, as the early withdrawal penalty disappears the moment you separate from service, regardless of how old you are. “The catch is taxes,” Watts said. “Every dollar still comes out as ordinary income, but the penalty barrier that makes early 401(k) access so costly simply doesn’t exist.”
When an early withdrawal makes sense
There are situations where tapping a 401(k) early is the right call. Avoiding foreclosure, covering a serious medical expense, or getting through a short-term crisis with longer financial consequences are all legitimate reasons.
In those cases, the goal is damage control. Before you withdraw, understand the tax hit ahead of time, and treat it as a last resort.
How to recover after an early withdrawal
An early withdrawal doesn’t end a retirement plan. If you do withdraw, you still have options to recover with some adjustment.
“It’s likely not the end of the world if you’ve taken an early withdrawal, especially if the amount was smaller and this was truly a one-off situation,” said Jonathan Vance, CFP at Vance Financial Planning. “Rebuild your cash emergency fund to an appropriate level to help prevent the need to take more withdrawals. Don’t let this single event start a habit of tapping into the funds. Remind yourself that the reason these savings exist is to fund your future retirement.”
A standard emergency fund target is three to six months of essential expenses, held somewhere liquid and accessible. That buffer is what keeps the next unexpected expense from turning into another withdrawal.
From there, bumping your contribution rate by even 1% to 2% can help close the gap over time, particularly if your employer offers a match you haven’t been capturing in full. Consistent contributions over a 10 to 15-year horizon go a long way toward recovering lost ground.
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