Your 401(k) plays a critical role in protecting your future, and that role is growing. NPR recently reported that the Social Security trust fund is on track to run out of money in just eight years. That means that unless something changes, tens of millions of Social Security recipients will lose a chunk of their benefits.
That’s already bad news for more than one reason. Current Social Security benefit levels are inadequate to provide full support to many Americans. In May of 2025, the average monthly retirement benefit was just $1,950.27. Some people’s benefits are much lower. Unfortunately, just 59% of respondents to a recent Gallup poll said they were participating in a retirement plan like a 401(k). Another source put that figure at 70%. Either way, that leaves a lot of people dependent on those sometimes meager and perhaps diminishing Social Security benefits.
Those with retirement accounts are typically somewhat better off, but the degree of security varies. In part, that’s because of variance in the size of the retirement accounts, particularly in relation to the age of the account holder. But a new trend is putting retirement security at even greater risk: a significant uptick in people making early withdrawals from their 401(k) accounts to cover pre-retirement expenses.
401(k) Hardship Withdrawals are Increasing
Multiple sources have identified an upward trend in 401(k) early withdrawals and hardship withdrawals. For example:
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Empower CEO Ed Murphy said 401(k) hardship withdrawals are running 15-20% above the historical norm.
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Vanguard reported the percentage of account holders taking advantage of hardship withdrawals has increased from 1.7% in 2020 to 4.8% in 2024.
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Vanguard also reported an increase in the percentage of account holders taking non-hardship withdrawals, from 3.4% in 2020 to 4.5% in 2024.
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The same report showed that the average monthly hardship withdrawal rate increased from 1.9 per thousand participants in 2015 to 7.6 per thousand participants in 2024.
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The Transamerica Institute looked at lifetime activity and reported that 31% of 401(k) holders had taken a loan against their retirement accounts and 21% had taken an early withdrawal or hardship withdrawal.
Many American households were destabilized by the pandemic. The cost of household goods, groceries, and other necessities rose significantly. Housing costs have increased. So, it’s no surprise that many people have felt it necessary to dip into their retirement accounts to cover expenses or emergencies.
Still, it’s generally not a good idea. Rebuilding a retirement account is a slow process, and none of us knows exactly when our careers will come to an end. Here are some key reasons you should avoid using your 401(k) if at all possible, and should virtually never use it to pay down debt.
4 Reasons Not to Gut Your 401(k) to Pay Debts
It will cost you much more than you think
People considering taking funds out of a retirement account such as a 401(k) to pay off debts like credit card balances are often swayed by the difference in interest rates. If you’re paying 19% interest on your credit card and earning 5% interest on your 401(k), it seems obvious that you’ll make money by getting rid of the high-interest debt. But it doesn’t often work out that way.
If you’re 30 years old today and have $10,000 in credit card debt at 19% interest and you pay that balance off very slowly–across 10 years–you’ll have paid about $12,400 in interest. That’s a big number, and the idea of paying more in interest than your underlying balance is discouraging. But the analysis doesn’t end there. If you’re 30, that $10,000 will likely be sitting in your 401(k) for another 35 years. At an average return of 5% compounded annually, your $10,000 will be worth $55,160.15 when you retire. That’s a gain of $45,160.15. In other words, you’d have given up $45,160.15 to save $12,400, for a net loss of more than $32,000. That’s almost exactly the per capita annual income in Los Angeles.
And that’s before you consider penalties associated with early withdrawal of tax-deferred retirement funds: tax on the amount withdrawn, plus a 10% penalty. If your plan allows for loans against your 401(k), you may be able to avoid this cost. But you’ll still lose the interest and compounding until the loan is repaid. And, if you leave your employer before the loan is repaid, you’ll have to find a way to make quick repayment or get hit with those taxes and penalties.
You’re putting your future at risk
Of course, the risks are greater if you’re closer to retirement age and if the withdrawal or loan is large. Still, none of us knows exactly what the future holds. Depleting your retirement account thinking you’ll rebuild later is a gamble. If you’re unable to rebuild as planned, you may have shifted from a path toward a comfortable retirement to facing significant adjustments to your standard of living and financial insecurity at the time you’re least equipped to manage it.
Your 401(k) is protected from creditors
If you’ve fallen behind on debts and are considering cashing in or taking a loan against your 401(k) because you’re concerned about collection action, you should know that you’ll be giving up one of the few assets that’s generally off limits to creditors. That legal protection exists for a reason–the federal government recognizes the importance of people being able to provide for themselves in their old age.
If your debt problems are serious enough and you don’t find a solution, you could face lawsuits, lose your home, lose bank accounts and other assets. But, your 401(k) is protected to provide some financial stability in the future. That’s true even if you file bankruptcy. When you close it out or reduce the balance, you’re eliminating or weakening your own safety net.
There is almost certainly a better option
Using 401(k) funds to pay down debts is an easy go-to. The money is just sitting there, and paying down large debts can be a quick and efficient process compared with other possible solutions. But, of course, your money isn’t just sitting there–it’s growing, and it’s acting as a safety net. It’s well worth your time to explore other options.
The right answer will vary depending on your specific circumstances. You may be able to negotiate with creditors to craft a more manageable payment schedule. You may want to downsize and cut the budget where you can to gain more control over your finances, or to temporarily take on a part-time job. If your credit is good, you may be able to lower your interest rates and payments with a lower-interest loan or a no-interest balance transfer. Or, if your debt has truly become unmanageable, you may want to consider bankruptcy.
The bottom line is that there are many possibilities, though they may not be as obvious or efficient as taking money from your retirement account to pay off debt. You owe it to yourself and your family to educate yourself about those options before you wipe out or diminish your retirement account. In the end the goal is to keep the money you have earned, and tucked away, for your golden years.
Already Depleted Your Retirement Accounts?
In 2025, most people can add up to $23,500 per year to their 401(k) accounts. (Note that the limit is much lower for an IRA account.) Most people aren’t maxing this out, so if your retirement account has been drained or you just got a late start, you may want to increase contributions. Even a small increase on a regular basis can make a big difference over time.
If you’re 50 or older, you’ll also have the opportunity to make “catch up” deposits to a 401(k), 403(b) or certain other retirement accounts. In 2025, the annual limit is $7,500 in catch up contributions. The limit is even higher if you’re between the ages of 60 and 63.
Of course, not everyone can afford to make significant catch up contributions. But, if you took funds out of your retirement account during a crisis and the crisis has passed, you should be crunching the numbers on what you can do to build that account back up. This is obviously crucial for older workers who are nearing retirement age. But, in a sense, it’s even more important for those who are decades from retirement, since those contributions will have time to grow.
Talk to a Los Angeles Bankruptcy Attorney
At Borowitz & Clark, we’ve been helping people resolve debt for decades. We offer free consultations to help you gather the information you need to make the best decision for you and your family. To learn more, schedule a free consultation right now. Just call 877-439-9717 or fill out the contact form on this page.