Ted Cruz Says 401(k) Hardship Withdrawals Hit A Record. Here’s What One Really Costs

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Sen. Ted Cruz used his podcast this week to point at a number most people never see: the share of workers pulling money out of their 401(k) early because they have no other choice. Cruz said a record 6% of 401(k) holders took hardship withdrawals in 2025.

The figure matches Vanguard’s How America Saves 2026 report. Among the roughly 5 million workers in the 401(k) plans Vanguard runs, 6% took at least one hardship withdrawal last year. That was the sixth straight annual increase, up from 1.7% in 2020, or about 3.5 times as many.

A hardship withdrawal looks like a way out. For many savers it is the most expensive money they will ever touch. Here is what one costs, and the cheaper options to check first.

Why people are taking the money

Vanguard tracks the reason given for each withdrawal. The most common were:

• Avoiding foreclosure or eviction: 36%
• Medical bills: 31%
• Tuition: 13%
• Home repairs: 11%

The typical withdrawal is small. The median was $1,900. That suggests most of these savers are covering a single bill they could not pay any other way.

It also happened in a year when balances rose. Vanguard found the average 401(k) balance grew 13% in 2025 to a record $167,970. Rising balances and rising hardship withdrawals point to the same thing: many households have savings locked in a retirement account and very little cash outside it.

What a $10,000 hardship withdrawal really costs

Take a 52-year-old with $85,000 in a traditional 401(k) who needs $10,000 for a roof that is leaking now. They are in the 22% federal tax bracket.

A hardship withdrawal from a traditional 401(k) counts as taxable income. Under age 59½, the IRS usually adds a 10% penalty on top. So to end up with $10,000 in hand, this saver has to withdraw about $14,706:

• Federal income tax at 22%: about $3,235
• 10% early-withdrawal penalty: about $1,471
• Total cost today: about $4,706, or 47% on top of the $10,000 they actually needed

State income tax would add more in most states.

The larger cost comes later. Hardship withdrawals cannot be paid back into the plan. The $14,706 that leaves the account would have kept growing for 15 more years until age 67. At a 6% yearly return, it would have been worth about $35,244 by then.

Put another way, the withdrawal takes 17.3% of this saver’s balance. If the remaining $70,294 grows at 6% a year, it reaches about $168,464 at 67, compared with about $203,707 if the money had stayed. A $10,000 roof costs this saver roughly $35,000 of retirement money.

Cheaper options to check first

Before filing a hardship request, it pays to look at four alternatives.

1. A 401(k) loan. Many plans let you borrow up to half your vested balance, to a maximum of $50,000. There is no income tax and no penalty, and the interest you pay goes back into your own account. Most loans run up to five years. The catch: if you leave or lose your job, the balance usually comes due by your tax filing deadline, and whatever you can’t repay is treated as a withdrawal, with the tax and penalty.

2. The $1,000 emergency withdrawal. Since 2024, plans can let savers take up to $1,000 a year for an emergency expense without the 10% penalty. It is still taxed, so in the 22% bracket $1,000 leaves about $780. It can be paid back within three years. That alone covers more than half of the $1,900 median hardship withdrawal.

3. The medical exception. If the money is for unreimbursed medical bills that exceed 7.5% of your adjusted gross income, the 10% penalty generally does not apply to that portion. In the example above, that would cut the withdrawal needed to about $12,821 and save about $1,885.

4. Money outside the 401(k). A payment plan with a hospital or contractor, a home equity line or a 0% card offer all cost something. Compared with a 47% upfront cost and decades of lost growth, they are often cheaper. Roth IRA contributions (the amount you put in) can also come out at any time without tax or penalty.

If you do take one

Take only what the bill requires. The plan will usually ask for proof of the expense, and the amount is limited to the need plus the taxes it creates. Keep contributing afterward if you can, especially up to the employer match, which is the fastest way to rebuild what left the account.

Where this is weak

The $35,244 figure assumes a steady 6% return. Real returns swing, and a bad decade would make the lost growth smaller. The tax numbers assume a 22% federal rate and no state tax. Plans also differ on whether they offer loans or the $1,000 emergency option, so the first step is a call to your plan administrator. And for someone facing eviction or foreclosure, keeping a home can be worth far more than the cost of the withdrawal.

The bottom line

Cruz is right that more workers are tapping their 401(k)s to get through hard times. Vanguard’s 6% is a record. For a 52-year-old in the 22% bracket, $10,000 of cash from a hardship withdrawal costs about $4,706 in tax and penalty today and about $35,244 of retirement money at 67. A 401(k) loan, the $1,000 emergency withdrawal or the medical exception can cut that bill sharply. Check all three first.

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