Roughly one in five Americans tapped their retirement savings early last year, and a growing share of them are doing it through something called a hardship withdrawal.
It sounds like a lifesaver when rent is due and the checking account is empty.
It also comes with a tax bill that many people don't see coming until April.
A hardship withdrawal lets you pull money out of a 401(k) for what the IRS calls an "immediate and heavy financial need." Qualifying reasons include medical bills, preventing eviction or foreclosure, funeral costs, and certain home repairs.
Your plan has to allow it, and you have to prove the need — usually with documents like a shutoff notice or a hospital bill.
Withdraw the money before age 59½ and you generally owe income tax on the full amount plus a 10% early withdrawal penalty.
Pull $10,000 to cover rent and you could hand back $2,500 or more once taxes and penalties land.
That's money that never makes it back into your retirement account.
The rules loosened a bit in recent years.
The SECURE 2.0 Act added new exceptions to the 10% penalty for emergencies and domestic abuse victims, and it now allows $1,000 a year for personal emergencies.
But those exceptions don't erase the income tax, and they don't apply to every plan.
Many employers still use the old, stricter hardship rules.
Before you call your plan administrator, know that a 401(k) loan is often the cheaper move.
You can typically borrow up to $50,000 or half your vested balance, whichever is smaller, and pay yourself back with interest.
Skip the loan and the money is gone for good — including decades of potential growth.
If you've already taken a hardship withdrawal, check whether your plan withheld taxes.
Many do, but often not enough to cover your full bill.
Setting aside a little now can keep a bad year from turning into a worse one.
One more thing to watch: scammers know people are desperate for cash.
Anyone promising to "unlock" your 401(k) or 403(b) early for a fee is almost certainly running a scheme.
The IRS has warned about these pitches for years. **Our take:** A hardship withdrawal is a real tool, but it's the most expensive money you'll ever borrow.
Final Thoughts
Treat it as a last resort, ask about a loan first, and if you do take one, start rebuilding that balance the moment you're back on your feet.