7 Reasons Americans Are Raiding Their 401(k)s Early Despite Experts Saying It’s a Bad Idea

Raiding your retirement savings early might seem like a quick fix during a financial pinch, but withdrawing funds early brings costly consequences. From penalties and taxes to the loss of long-term compounded growth, it could hurt your future security more than it helps at the moment.

A recent FinanceBuzz survey reveals just how common early withdrawals are — and the reasons behind them. Of the 53% of respondents with retirement accounts, 41% admitted to withdrawing funds early, with an average withdrawal amount of $15,021. Yet among these borrowers, only 43% have paid the money back.

The IRS penalties on early withdrawals — 10% plus applicable taxes — mean experts recommend avoiding them whenever possible. So why are so many Americans ignoring that advice? We surveyed 1,000 U.S. adults, and here’s what the data shows.

The most common reason Americans dip into their retirement savings early is to pay off credit card bills and other personal debt.

Nearly one in four survey respondents said they use these funds to manage credit card balances, car loans, and other mounting debts.

While a quick injection of cash can provide some temporary relief, this can be a risky move. Taking money from your retirement fund means you’re sacrificing long-term financial stability to solve a short-term problem.

Many early withdrawers aren’t taking out funds to cover an extra-large shopping spree. They need the money to stay afloat. Our survey found that 21% are withdrawing 401(k) funds to cover rent, utilities, or groceries.

That’s a rough spot to be in. Using retirement funds for everyday bills places you in a vicious cycle of financial instability — and sets you up for a rough retirement. Instead, you could consider downsizing housing or cutting expenses as much as possible.

Big-ticket items like a home or a car have led 19% of survey respondents to take an early withdrawal. While a home may seem like a smart investment, it comes at the cost of your retirement nest egg’s future growth.

Before you rob your IRA, consider alternatives like more aggressive budgeting or building an extra stream of income.

Medical costs not covered by insurance are another leading reason for early withdrawals, according to 18% of those surveyed. With the staggering cost of health care, this is somewhat understandable, but there may be better ways to handle unexpected medical costs.

Where possible, consider using FSA or HSA funds. Talk to a patient billing representative about making a long-term payment plan. Some medical providers may be willing to take even $10 a month until you’re able to make higher payments. You may even be able to settle the debt for less than half the balance owed.

Life happens, especially emergencies — and these emergencies tend to cost a lot of money. Eighteen percent of all respondents said they had withdrawn funds early for some sort of crisis.

Such situations are unavoidable, which is why a rainy day fund is critical. If you’ve had to withdraw funds for a personal emergency, make sure to build up an emergency savings account so you don’t need to raid your 401(k) plan again.

Home repairs or upgrades are why 11% of respondents have withdrawn funds early. From patching a leaky roof to replacing an HVAC system, these fixes aren’t cheap. Explore other financing options, such as home equity loans or interest-free financing. And if it’s a cosmetic update, wait until you can save up enough cash to make the changes.

A job loss or reduced work hours led 10% of respondents to make an early 401(k) withdrawal. While this premature access to cash can feel like a lifeline, it only deepens your financial predicament later.

If you need extra income now, beyond what any unemployment benefits offer, consider other alternatives such as part-time employment, side gigs, or emergency financial assistance programs. Some job seekers who have exhausted their unemployment even share GoFundMe campaigns for emergency assistance. While far from ideal, it’s much better than emptying your IRA.

Pulling money from your retirement account early might offer some immediate relief, but it’s not necessarily a smart financial move. From taxes and penalties to lost investment growth, the long-term drawbacks far outweigh any short-term benefits.

Before you empty your IRA, explore other alternatives such as stricter budgeting, peer-to-peer loans, or credit cards with an interest-free introductory period. And remember, if you’ve already withdrawn funds, make a plan to pay back as much as you can as soon as you can. 

No matter how many withdrawals you’ve made or what your 401(k) balance is, it’s never too late to save for a stress-free retirement.