Before you raid your 401(k) just to get by, read this

Millions of workers are quietly raiding their 401(k) systems just to cover daily expenses, fueling a hidden retirement crisis. A 2025 report from Fidelity Investments found that employees without emergency savings are twice as likely to withdraw or borrow from their retirement accounts. In fact, about 5% of employees had taken a hardship withdrawal as of December 2024, up from about 2% in 2018. Overall, 401(k) loans have been rising steadily since 2021.

The ripple effects extend beyond personal finances. Fidelity also found that financial pressures cost U.S. employers an estimated $183 billion annually in lost productivity, as workers preoccupied with rising costs struggle to stay focused on the job.

So, if you’re tempted to borrow or withdraw from your 401(k) account, think about it carefully first — dipping into your 401(k) now could mean delaying retirement by years.

Are 401(k) loans a good idea when you’re in a pinch?

A 401(k) loan allows you to borrow against your retirement savings — usually up to $10,000, 50% of your vested balance, or $50,000, whichever is less. Once approved, you’ll pay the amount plus interest (usually the base rate plus 1%-2%). Generally within five years. The money you borrow from your 401(k) can be used for anything.

While a 401(k) loan may seem like a convenient lifeline when money is tight, it comes with significant trade-offs. The biggest advantage is accessibility – applying for one is usually simple, with no credit check required, no impact on your credit score, and the interest is paid to your own account rather than to the lender. Interest rates are often lower than personal loan rates, making this an attractive short-term solution.

However, the negatives are significant. You’ll lose potential investment growth when borrowed money is out of the market, which can slow your progress toward retirement. If you quit or lose your job, you’ll likely have to pay off the full balance quickly — often by the next tax filing deadline — or risk having the loan treated as a taxable distribution. That means income taxes and a potential 10% penalty if you’re under 59 and don’t qualify for an exception, according to the Internal Revenue Service (IRS).

Additionally, you can only borrow from your 401(k) if your plan allows it and you are still employed by the sponsoring company. Since loan limits are capped at 50% of your earned credit, they may not cover all your financial needs. For many people, the short-term relief of borrowing from a 401(k) may not be worth the long-term cost of retirement security.

Alternatives to 401(k) loans.

Before tapping into your retirement savings, it may be worth exploring other forms of financial relief.

For example, personal loans can offer flexible repayment terms and may not jeopardize your retirement future. They require you to find a lender, submit an application, and authorize a hard credit check. Personal loans are available in amounts ranging from several thousand dollars to more than $100,000, and interest rates can vary based on credit score. One big difference between 401(k) loans and personal loans is that they don’t carry the same tax penalties or repayment risks if you lose or leave your job. It also does not affect the growth of your retirement account over time.

Additionally, setting aside even a few months’ worth of expenses in an emergency savings account can prevent the need to tap retirement funds during unexpected hardships or to pay for unplanned expenses.

Steps you can take to boost your 401(k) plan contributions.

Even small changes can have a big long-term impact on your retirement savings. Once you’re financially stable again, consider gradually rebuilding your retirement cushion by following these steps:

• Increase your contribution rate: Boosting your 401(k) contribution by 1% per year can significantly increase your future balance thanks to compounding.
• Capture your full employer match: If your employer offers a matching contribution, make sure you contribute enough to get the maximum contribution. It’s basically free money for retirement, so you won’t want to miss it.
• Automate future increments: Check to see if your retirement plan allows you to automatically raise your contribution percentage each year. This helps your savings grow with your income and inflation.

Bottom line

Tapping your 401(k) for short-term needs may solve a problem today, but it could create a much bigger problem tomorrow. Loans and withdrawals reduce the value of your nest egg, disrupt compounding growth, and may delay your retirement timeline by years. Before you borrow from yourself in the future, explore safer and more sustainable ways to manage financial stress. Your future security depends on it.