BONUS PLAY: “When You Have to Raid Your Retirement”

Two trends are colliding right now—and if you’re in your 40s or 50s, you’re probably watching both.

First, layoffs. More than 1.2 million job cuts were announced in 2025—up 58% from 2024 and the highest since the pandemic. January 2026 brought 108,435 more, up 118% from January 2025. Some forecasters expect unemployment to peak around 4.5% this year, and a Harris Poll in October found that 55% of employed Americans are concerned about losing their jobs.

Second, retirement withdrawals. Vanguard reports that 4.8% of participants in Vanguard-administered plans took hardship withdrawals in 2024—up from 3.6% the year before, and more than double pre-pandemic levels. The top reasons: avoiding foreclosure or eviction, and medical bills.

These numbers are connected. When people lose income and don’t have emergency savings, they tap the only asset they have.

If you’re facing that decision—or worried you might be soon—no judgment here. Sometimes there’s no good option, just least-bad options. Let’s walk through how to think about this, what it actually costs, and if you have to do it, how to do it smartly.

The real cost of tapping retirement early

This isn’t a lecture. It’s the math.

If you take a hardship withdrawal from a traditional 401(k) before age 59½, you’ll owe income taxes plus a 10% early withdrawal penalty. In the 22% federal bracket with 5% state tax, that’s 37% gone before you see a dollar. To net $15,000, you may need to withdraw closer to $24,000.

And that $24,000 doesn’t just disappear from your account—it disappears from your future. At 7% average annual returns, $20,000 withdrawn at age 45 would have grown to roughly $75,000 by age 65.

That’s the real cost: not just what you take out, but what it would have become. A $20,000 emergency today could cost you $75,000 in retirement. That’s not a reason to lose your house—but it’s a reason to exhaust other options first.

Before you touch your 401(k): the order of operations

Work through these in order. Each does less damage than a hardship withdrawal.

1. Emergency savings. If you have cash in a savings account, use it first. That’s what it’s for.

2. Roth IRA contributions. You can withdraw your contributions—not earnings, just what you put in—at any time, tax-free and penalty-free. You’ve already paid taxes on that money. If you’ve contributed $30,000 over the years and it’s now worth $45,000, you can pull out up to $30,000 with no taxes or penalties. (Make sure you’re tracking contributions vs. earnings—your custodian can usually show this.)

3. HSA funds. If your emergency is medical and you have a Health Savings Account, use it for qualified medical expenses—including reimbursing yourself for eligible expenses you’ve already paid out of pocket.

4. Friends and family. If you have people who can help—and you can have an honest conversation about repayment—this may be less costly than tapping retirement. Not everyone has this option.

5. 401(k) loan. If you’re still employed and your plan allows it, you can borrow from your own 401(k)—typically up to 50% of your vested balance or $50,000, whichever is less. You pay yourself back with interest. No taxes or penalties as long as you repay on schedule.

The catch: if you leave your job, most plans will treat the outstanding balance as a distribution, triggering taxes and penalties. Some workarounds exist (you may be able to roll over a plan loan offset by your tax-filing deadline), but the rules are technical and timing-sensitive. Don’t rely on a 401(k) loan if layoff risk is high.

I know someone who took a 401(k) loan during the pandemic. They didn’t have emergency savings. The loan got them through until they found work, and they paid it back. It worked.

I also know someone who took a 401(k) loan for a “great investment opportunity.” They lost money on the investment, then spent years cutting their household budget to catch up on retirement contributions.

Borrowing against your retirement to bridge a real emergency can make sense. Borrowing to chase a speculative opportunity is doubling down on risk with money you can’t afford to lose.

6. The $1,000 penalty-free withdrawal. Most people don’t know this exists. As of 2024, there’s an “emergency personal expense” exception that lets you take up to $1,000 without the 10% penalty (taxes still apply). If you don’t repay or make it up through contributions, you may be blocked from another for three years. Not every plan offers it—ask your administrator.

If none of the above work, you’re into last-resort territory.

7. Hardship withdrawal. Understand what you’re giving up: taxes, penalties, and the money is gone permanently. You cannot pay it back.

8. Credit cards. High interest compounds the problem. If you’re choosing between a hardship withdrawal and credit card debt, the retirement withdrawal may actually be less damaging—depending on amounts and your ability to pay off the card. Do the math. And if you go the card route, call and ask about a temporary hardship APR reduction before you carry a balance.

Loan vs. hardship withdrawal: the critical difference

A 401(k) loan: you borrow from your account and pay yourself back with interest. No taxes or penalties if you repay on schedule. The money goes back into your account.

A hardship withdrawal: you take money out permanently. You owe income taxes on the full amount. You owe a 10% penalty if under 59½ (with some exceptions). You cannot pay it back.

If a loan is available and your employment is stable, it’s usually the better option. A hardship withdrawal is a one-way door.

What qualifies for a hardship withdrawal

The IRS requires an “immediate and heavy financial need.” Common qualifying situations may include medical expenses; costs to prevent eviction or foreclosure; costs to purchase a primary home; tuition and education fees; funeral expenses; and certain disaster-related home repairs.

Not every plan has adopted every option. Check with your HR department or plan administrator.

If you have to do it: minimize the damage

Take only what you need. Every extra dollar is taxed, penalized, and permanently removed from your future.

Understand the tax hit. The withdrawal adds to your taxable income. A large withdrawal could push you into a higher bracket. If timing allows, consider splitting across two calendar years.

Keep contributing. The old rule requiring a six-month pause after a hardship withdrawal is gone under current rules. Keep contributing—especially if your employer matches.

Recovering afterward

Don’t stop your contributions. At minimum, contribute enough to get your employer match.

Increase contributions when you’re stable. The 2026 limit is $24,500. If you’re 50 or older, you can add $8,000 more. If you’re 60-63, the “super catch-up” lets you add up to $11,250. A big withdrawal takes time to rebuild, but every year you delay makes it harder.

Build an emergency fund—even a small one. Vanguard research shows that people with just $2,000 in emergency savings are 17 percentage points less likely to take a hardship withdrawal and 43 percentage points less likely to cash out their 401(k) when they leave a job. Even $50 a month into a savings account creates a buffer.

Don’t beat yourself up. You made the best decision you could with the options you had. What matters now is what you do next.

The bottom line

“Don’t touch your retirement” is great advice—if you have emergency savings, if you haven’t been hit with a crushing expense, if you have people who can help.

That’s not most people.

For everyone else, your retirement savings is one more asset. One you want to tap toward the end of your options, not the beginning. But if you have to do it, you have to do it. That’s not failure. That’s dealing with life.

Work through the alternatives. If you must withdraw, do it smartly. Then focus on rebuilding.

You’re not behind. You’re handling what’s in front of you.

This is general guidance, not legal or tax advice. Rules vary by plan and situation.