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Think Before You Take. Don’t Make My Mistake.

I was 23 and fresh out of college. Like many twentysomethings, my priorities were Friday and Saturday nights, hanging with friends, and piecing together enough income to cover rent and beer. I worked a desk job by day and picked up restaurant shifts at night and on weekends to make ends meet.

Then came March 2004. I got called into my supervisor’s office and was told my job was being eliminated due to budget cuts.

I qualified for unemployment, but in Arizona at the time, that maxed out at just $215 a week. Thankfully, I still had the restaurant gig and was able to pick up more hours, but it wasn’t enough. I was living paycheck to paycheck and growing more anxious by the day.

At the time, it didn’t seem like a huge deal. My taxable income for the year was only about $30,000, and I ended up getting a small tax refund. But let’s break down what really happened when I withdrew that $3,000:

Recently I did some consulting work in a retirement service center of a well-known national broker-dealer, assisting with both distributions processing and fielding participant phone calls. Given the recent economic climate, many requested hardship withdrawals, termination distributions, or loans just to make ends meet, not recognizing the long-term ramifications of those often-uninformed decisions.

Sadly, most of us were never taught how to prepare for the unexpected. Fortunately, some states now require financial literacy classes to graduate high school, and more community organizations are stepping up to fill the gap.

So here’s what many people don’t realize:

1. It’s not a checking account. Your 401(k) is meant to help you retire one day—not to cover short-term emergencies.
2. Hardship withdrawals are limited. Even if your employer allows them, you have to qualify. The IRS only permits withdrawals for specific reasons—like avoiding foreclosure, covering medical expenses, or paying tuition. You’ll also need documentation to prove your case.
3. Taxes and penalties hurt. If you’re under 59½, you’ll likely owe both income taxes and a 10% early withdrawal penalty. I gave up almost 30 cents of every dollar I took out. That adds up—fast.

The Power of Time and Compound Growth

• Borrow a set amount (min. $1,000, max. $50,000 or 50% of your vested balance)
• Interest is charged (usually prime, or prime plus a margin)
• Repay it over 1–5 years (up to 30 years for a home purchase)
• There may be an origination fee

• Plan must allow loans—not all do, meaning that if your plan doesn’t allow them, you can’t borrow
• Limits apply—some plans cap the number of loans, how often you can take out, or whether refinancing a current loan is even an option
• Purpose may matter—general use, hardship, or home purchase (if hardship only, you must adhere to the IRS hardship rules)
• Repayment flexibility varies—some plans don’t allow extra payments
• Loan history affects new borrowing—some plans look at your highest balance in the last 12 months

• Loan payments come from your after-tax pay, but traditional 401(k) dollars are taxed again when withdrawn later. Even Roth repayments (for which the contributory portion was already taxed at the time of deposit) still reduce your take-home pay. That means if you’re paying $150 per check, that’s $150 less in your pocket until it’s repaid.
• If you terminate employment and you don’t repay the loan within a short window (the “cure period”, usually somewhere between 4 to 6 months following termination), the remaining balance may be treated as a distribution—triggering taxes and possible penalties.

So, what’s the catch?

Using a 401(k) loan to knock out high-interest debt can make sense. And generally speaking, a loan is often better than a withdrawal—mainly because of the tax consequences. But it’s not one-size-fits-all. Always check what your plan allows and explore other options too—you might have more than you think.

If you don’t already have one, it’s a good idea to build an emergency fund—also known as a “slush fund.” This type of account is intended to be earmarked for those unexpected short-term expenses, such as:

• Job or income loss
• Non-routine medical or dental expenses
• Emergency home or car repairs
• Travel due to family illness
• Temporary living or relocation expenses

Got a stash of sports cards or comic books collecting dust in the attic? What about that exercise equipment you picked up during COVID that’s now doubling as a coat rack (true story)? Or clothes you haven’t worn in ages but are still in great shape? There are tons of apps, websites, and second-hand stores where you can turn those unused items into extra cash.

Bottom Line: Make Retirement Withdrawals a Last Resort

When the going gets tough, it’s easy to slip into crisis mode. We all need money to live—but when the well runs dry, it’s hard to know where to turn. I spoke with countless people through the call center who were already stretched thin, and too often, I had to deliver difficult news: hardship withdrawals or loans weren’t available to them, or they had already used up what they could.

Life throws curveballs—layoffs, medical emergencies, natural disasters, and more. And while those moments can feel overwhelming, they don’t define you.

But when they do happen, use them as a chance to reassess. Build a budget. Start saving. Tackle your debt. Create a financial cushion through an emergency fund.