Americans are increasingly turning to their retirement accounts as lifelines, with the percentage of people taking hardship withdrawals more than doubling from pre-COVID levels. According to a new Vanguard report, hardship withdrawals increased to 4.8% in 2024 from 3.6% in 2023.
Hardship distributions entail “immediate and heavy financial need” (the IRS’s words, not mine). The report noted that retirement accounts can act as a safety net. And if you have no other options, tapping into your 401(k) or IRA can provide the funds you need. But before doing so, it’s important to understand the impacts:
- You can typically avoid paying an early withdrawal penalty if the hardship is qualified, but the amount you take out is subject to income taxes.
- Pausing your contributions could be a solution — it will negatively affect your long-term growth, but doing so will keep your principal intact.
- If you require more money than a pause would provide, understand that over the long term, tapping into your principal can have a significant impact.
Let’s focus on that third point. Unlike taking a loan against your retirement accounts, hardship withdrawals aren’t required to be paid back.
Imagine a scenario in which Person A and Person B both have amassed $100,000 balances with 20 years left until retirement. Both will receive the same return annually.
However, both suddenly face a situation that requires an emergency expense. Person A finds a way to satisfy that expense without tapping into their 401(k), while Person B withdraws $50,000. Both of them continue to make $500 monthly contributions for the remaining two decades. When they reach retirement age:
- Person A will have accrued $1,093,530.85.
- Person B will have accrued $733,052.46.
That’s nearly a 50% difference in retirement savings over the course of 20 years. The takeaway: Only use your retirement accounts to pay for emergencies as a last resort. Your future self will be tremendously thankful.
— Jordan Chussler, investing and banking editor 
