A record 6% of Vanguard 401(k) participants took a hardship withdrawal in 2025, up from 4.8% in 2024 and roughly 2% before the pandemic. It is the sixth consecutive annual increase, and the headline writes itself: American savers are under strain.
That reading is half right. The more useful number is buried underneath it — the median hardship withdrawal was $1,900.
A record that measures access, not only distress
Part of the six-year climb is a rules change, not a purely economic signal. The Bipartisan Budget Act of 2018 removed the requirement that participants exhaust available plan loans before requesting a hardship distribution, effective for plan years beginning after December 31, 2018. The same law directed regulators to scrap the rule suspending a participant's contributions for six months after a withdrawal — a penalty that had made hardship distributions genuinely painful to use.
The effect was immediate: hardship withdrawals jumped roughly 40% in the first months of 2019. SECURE 2.0 loosened the process again, letting employers rely on an employee's self-certification of hardship for distributions after December 31, 2022.
The corroborating evidence is in the loan data. Vanguard reports 401(k) loan usage stayed flat and below pre-pandemic levels while hardship withdrawals climbed. If pure financial desperation were the whole story, both lines would rise together. Instead, one channel got easier to use and absorbed demand from the other.
That distinction matters, because savers are substituting toward the more expensive option.
Why $1,900 is the expensive way to raise $1,900
A 401(k) loan is repaid to your own account. A hardship withdrawal cannot be repaid — that is the single most important difference, and the one most participants miss. The money leaves the tax-advantaged wrapper permanently, and the contribution room that sheltered it does not come back.
It is also taxed as ordinary income in the year received, plus a 10% early-distribution penalty if you are under 59½. Some hardship reasons — certain unreimbursed medical expenses, for example — can qualify for a penalty exception, but being in hardship does not by itself waive the 10%.
Run the illustration on the median. A saver in the 22% federal bracket withdrawing $1,900 under 59½ faces roughly 32% in combined tax and penalty — about $608, before any state income tax. They net near $1,292 in hand, having permanently removed $1,900 from a creditor-protected, tax-advantaged account.
Vanguard's top cited reasons — avoiding foreclosure, preventing eviction, medical bills — are real emergencies. The question is rarely whether to address them. It is which pocket to use.
Practical takeaways
- Price both options before choosing. A plan loan repaid to yourself and a hardship withdrawal are not close substitutes at these amounts.
- Ask whether a penalty exception applies. Medical and other narrow categories can remove the 10%, changing the math materially.
- Check what your plan offers. Many plans now permit small penalty-free emergency distributions that are repayable; availability is optional and varies by employer.
- Withhold deliberately. Hardship distributions are taxable income; under-withholding creates an April bill on top of the shortfall you were solving.
- Treat the $1,900 as a signal. Withdrawals that small usually point to a missing cash buffer, not a retirement problem — and a buffer is far cheaper to build than to replace.
Sources: Vanguard How America Saves 2026 (via Fox Business), PLANSPONSOR, Wagner Law Group, National Law Review, IRS