Hardship Withdrawals Are at a Record High — And Your 401(k) Could Be Next
Executive Summary
Retirement account balances hit record highs in 2025, but so did hardship withdrawals: 6% of Vanguard 401(k) holders took one. Keith Demetriades explains why both trends are happening simultaneously, the hidden plan restrictions that can block you from accessing your own money during a financial emergency, and how the Separation Strategy—liquid reserves on one side, retirement savings on the other—can help reduce the need for hardship withdrawals.
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Hardship Withdrawals Are at a Record High — And Your 401(k) Could Be Next
Recent data shows retirement account balances hit an all-time record high in 2025. People are saving more money than ever before. But hardship withdrawals also hit a new record: 6% of Vanguard 401(k) holders took one in 2025.
Growth and erosion, happening side by side.
The reason both are happening simultaneously is more complicated than you might think. There are rules buried inside your 401(k) that can block you from getting your own money when you need it most—rules your plan controls, not the IRS. And most people have no idea they exist until they’re already in a financial emergency.
What are the three ways money can come out of a 401(k) early?
Before understanding why hardship withdrawals are climbing, you need to understand all the ways money can come out of a 401(k) early, and when it can’t.
An early withdrawal is the option people know best. If you take money out before age 59½, you typically pay income taxes plus a 10% penalty. It’s painful tax-wise, but there’s no limit on the amount you can take and no conditions you have to meet.
But here’s what many people don’t know: while you’re still employed, your plan might not actually allow it. Some plans restrict or prohibit in-service withdrawals because the IRS wants your money to stay in the account and grow until retirement. The plan document controls what you can access, and many people don’t discover that until they’re already facing a financial emergency.
Those plan limitations are why hardship withdrawals exist. If your plan offers them, you’re allowed to make a withdrawal if you can demonstrate an immediate and heavy financial need—medical expenses, costs to prevent eviction or foreclosure, tuition, or certain home repairs. But you have to provide certification of how much money you need, you’ll owe income taxes on the full amount, and you may still pay the 10% penalty.
Neither option is ideal from a tax and penalty perspective.
The third option is a 401(k) loan. If your plan allows it, you can borrow against your own balance and pay yourself back over time, typically within five years. These loans have conditions: the cap is 50% of your vested balance or $50,000, whichever is less, and you have to be able to make the repayments. If you leave your job while the loan is outstanding, it might require quick repayment. But there’s typically no 10% penalty and no immediate tax hit.
Why are hardship withdrawals at record highs if 401(k) loans exist?
If the loan is a better option, why are 6% of people taking hardship withdrawals instead?
Because the loan isn’t always available. Not every plan offers one. Or the cap may not cover what you need. And if you’re already in enough financial distress that you’re considering tapping your retirement account, taking on a repayment obligation on top of everything else may not be realistic.
For many people, the hardship withdrawal isn’t a choice. It’s the only door available. And the fact that more people are walking through it every year tells you something important about the financial pressure people are actually under.
What is the access gap and why does it matter?
The access gap shows up more often than you’d think. Someone with significant wealth tied up in real estate, a business, or a healthy six-figure 401(k) looks solid on paper. But ask them: if you needed $75,000 in the next thirty days, without selling anything or touching your retirement account, what would you do?
The silence is loud, but the silence isn’t always about a gap in wealth. It’s a gap in financial architecture.
The 401(k) was built to do one thing: fund retirement. That’s the whole purpose behind the tax advantages, the contribution limits, and the penalty structure. But for a growing number of people, it’s stopped being a retirement account and started being a financial backup plan. But that’s not what the account was designed for, and the trade-off is costly.
The need for a hardship withdrawal is actually a symptom of a larger problem. When something goes wrong, the 401(k) is sometimes the only way people can access money quickly. In most situations, that means there was no liquid financial buffer available.
People have wealth that’s strong on paper but short on cash.
What is the Separation Strategy?
The solution is to build in more liquidity as part of your plan. What I call the Separation Strategy—liquid reserves on one side, retirement savings on the other, and enough separation between them that a financial emergency never forces you to choose between solving today’s problem and funding tomorrow’s retirement.
Treasury bills, short-term bond funds, cash management accounts, and money market funds all keep your money working while staying accessible. Three to six months of expenses is a reasonable target, although the right amount depends on your specific situation.
What you’re really doing is planning for life. You’re building for the things you already know are coming, even if you don’t know exactly when. These aren’t surprises, they’re certainties with unknown timing.
What does proper liquidity planning actually look like in practice?
When the Separation Strategy is in place, a major medical event lands and you handle it from your liquid reserves—no forms, no penalties, no retirement setback.
A property needs significant work. You write the check without it becoming a financial crisis.
A job transition you didn’t see coming? You have the liquidity to land on your feet.
And your 401(k)? It keeps doing what it was built to do.
The people who avoid hardship withdrawals aren’t necessarily wealthier. They’ve just planned for the predictable, so when it hits, their 401(k) stays out of it.
Real Wealth Starts With Real Life.
Contact Information
Keith Demetriades, CFP®, CKA®, believes real wealth starts with real life. He created the 4D Client Experience to help guide decision-making and ensure your money works as a tool to support your life. If you’re ready for a financial plan that reflects how you live and what you’re building toward, contact Keith at (806) 223-1105 or visit Kingsview Partners.
Disclaimer
The information provided in this blog is for educational purposes only and should not be considered financial advice. Please consult a qualified financial advisor to discuss your specific situation and needs. Past performance does not indicate future results, and all investments carry risks, including potential loss of principal. Any financial product or strategy references are purely illustrative and should not be construed as endorsements or recommendations.
Investment advisory services are offered through Kingsview Wealth Management, LLC (“KWM”), a SEC Registered Investment Adviser. Insurance products and services are offered and sold through Kingsview Insurance Services, LLC (“KIS”), by individually licensed and appointed insurance agents. KWM and KIS are subsidiaries of Kingsview Partners.
