Down On Your Luck? Your 401(k) Might Be Able to Help You Out
Whether you're facing an unexpected job loss, a medical emergency, or a financial crisis, life's hurdles may leave even the most responsible savers scrambling for cash. If you’re feeling the squeeze, you might be looking at your 401(k) as a potential lifeline.
It’s probably not ideal to dip into your retirement savings before you've retired. But in tough times, your 401(k) may sometimes provide much-needed relief. It's essential to know your options, understand the trade-offs, and choose the appropriate path that makes sense to you.
Let’s break down the most common ways to access your 401(k) in a pinch and the pros and cons of each.
Option 1: 401(k) Loans – Borrowing From Yourself
One of the most flexible ways to tap into your 401(k) without immediate tax consequences is through a 401(k) loan1 – that is, if your plan allows it.
Through a 401(k) loan, you borrow a lump sum from your 401(k) and pay it back (plus interest) through automatic deductions from your paycheck. Most plans allow you to borrow up to $50,000 or half of your vested balance, whichever is less. The typical repayment term is five years.
Some of the advantages of this approach include: (1) no credit check, since you're borrowing your own money; (2) no taxes or penalties up front, as long as you repay the loan on time; and (3) the interest you pay goes back into your 401(k), not to a bank. With some 401(k) plans, you may have your funds directly deposited into your bank account in as little as a few days.
But a 401(k) loan isn't without its drawbacks. The money you borrow from your retirement account is no longer invested in the market, which may put your savings behind schedule. You must repay the loan with after-tax dollars, even though you pay taxes again when you withdraw the money during retirement. And if you leave your job before the loan is paid off, you may have to repay the full balance quickly or face taxes and penalties. Five years may be a long time to stay with the same employer, especially during economic uncertainty.
Option 2: Hardship Withdrawal – Taking the Money Out
If borrowing isn’t an option—or if your situation is an emergency—you may qualify for a hardship withdrawal. This allows you to permanently withdraw money from your 401(k) before retirement age, but there are stricter rules.
What qualifies as a hardship?
The IRS defines hardship as an “immediate and heavy financial need.” Examples include medical expenses, funeral costs, preventing foreclosure or eviction, tuition and educational fees, home repairs due to damage, and some disaster-related expenses (e.g., from FEMA-declared events). To qualify for a hardship withdrawal, you must demonstrate your need and document that you’ve exhausted other options.
Some of the advantages of a hardship withdrawal include: (1) no repayment is required; (2) it's an option if you've left your job or your employer doesn't offer 401(k) loans; and (3) it may cover any emergency needs that fall within the IRS's guidelines.
But you also have to pay taxes on the amount you withdraw, which is taxed as ordinary income. If you're under age 59-and-a-half, you also pay a 10% early withdrawal penalty (unless you qualify for an exception). And you may not put this money back into your retirement account.
Some exceptions to the 10% early withdrawal penalty include permanent disability, qualified medical expenses, and certain military or disaster-related situations.
Option 3: Separation From Service After Age 55
If you’re 55 or older and leave your job—either voluntarily or through layoff—you may be able to tap your 401(k) without the 10% early withdrawal penalty (even though you’re under 59-and-a-half). This is often called the “Rule of 55.”
Some advantages of this approach include: (1) penalty-free access; (2) greater flexibility than a hardship withdrawal; and (3) the ability to take distributions as you need them, instead of in a lump sum.
However, you still owe income tax on your withdrawals, and you may only access the 401(k) funds from your most recent job, not from old accounts. Still, if you were already close to retirement and lost your job unexpectedly, this rule could offer some breathing room without the extra cost of a penalty.
Option 4: CARES Act & Other Disaster Relief
In response to events like the COVID-19 pandemic or major natural disasters, Congress sometimes passes temporary relief legislation that makes it easier to access retirement funds.
In 2020, for example, the CARES Act allowed penalty-free withdrawals of up to $100,000 and extra time to pay taxes or repay the funds.
While there’s no federal program like that in place for 2025 (at the time of writing), it’s always worth checking to see if special disaster relief provisions apply to your situation, especially after FEMA-declared emergencies.
Alternatives to Consider
Before dipping into your 401(k), look at all available resources, including (1) emergency savings or high-yield savings accounts; (2) personal loans or credit unions; (3) selling unused items or assets; (4) government assistance or nonprofit programs; and (5) temporary side gigs or freelance work.
Even if it takes adding together some alternatives, you should try to stay in alignment with your long-term goals. If you're seeking a hardship withdrawal from your 401(k), you might be required to show you've exhausted these options before you qualify for the use of 401(k) funds.
Your 401(k) May Help—But It’s Not Free Money
Your 401(k) is meant for retirement. But in a financial crisis, it may be one of the most accessible sources of funds you have. Whether through a loan or withdrawal, it may provide short-term help during tough times.
Just remember: every dollar you take out now is one less dollar working for your future. If there is any alternative, try to preserve your funds for retirement because you may have an emergency come up then, too. If you do decide to tap into your retirement savings, create a plan to replenish your account over time, and consult a qualified financial professional. Getting a little guidance now may support your plans down the road.
Transform Your Money-Fears into Money-Loves!
Unlock your patterns, gain clarity and focus, and become supremely confident with money using my simple 8-step approach to changing your financial future.
