401(k) Loans as a Response to Financial Stress: Navigating the Trade-Offs Between Short-Term Relief and Long-Term Retirement Security

The American retirement system faces a growing paradox: while 401(k) loans are increasingly used to address immediate financial stress-particularly for healthcare and housing expenses-their long-term consequences threaten to undermine retirement security. This tension reflects deeper systemic vulnerabilities in how households manage financial shocks and plan for the future.

Rising Reliance on 401(k) Loans for Essential Expenses

Recent data underscores a troubling trend. According to a report by the Employee Benefit Research Institute and JPMorgan Asset Management, nearly half of households with a new 401(k) loan experienced healthcare costs rising more than 10% in the year they borrowed. This is significantly higher than increases in discretionary categories like travel or entertainment. Housing expenses, meanwhile, have also driven borrowing, with a notable rise in the share of total outlays for housing among borrowers compared to non-borrowers according to the same report.

These patterns are exacerbated by broader economic pressures. Healthcare premiums have surged by 47% from 2013 to 2023, while housing costs remain a persistent strain for many. The SECURE 2.0 Act, introduced in 2022, has sought to address these challenges by enhancing retirement savings through mandatory automatic enrollment and increased catch-up contributions for older workers according to Mercer's analysis. Yet, these measures have not fully mitigated the reliance on 401(k) loans as a stopgap solution.

The Long-Term Cost of Short-Term Solutions

While 401(k) loans offer immediate liquidity, their long-term implications are severe. When funds are borrowed, the amount is not invested during the repayment period, leading to lost compounding opportunities. Repayments are made with after-tax income, and withdrawals in retirement are taxed again as ordinary income-a double taxation that erodes savings efficiency according to financial experts.

Job changes further complicate matters. If an individual leaves their employer, the loan balance is typically due by the tax filing deadline. Failure to repay results in the remaining balance being treated as an early distribution, subject to income taxes and a potential 10% penalty according to loan guidelines. Alarmingly, studies indicate that approximately 86% of employees who change jobs with an outstanding 401(k) loan default on the balance, leading to significant losses in retirement capital.

Strategic Alternatives to Preserve Retirement Capital

To avoid these pitfalls, individuals must consider alternatives that balance immediate needs with long-term goals. Emergency savings funds, for instance, can cover unexpected expenses without depleting retirement accounts according to financial advisors. Personal loans, though often carrying higher interest rates than 401(k) loans, offer flexible repayment terms and avoid the risks of retirement account depletion according to financial experts. For homeowners, a home equity line of credit (HELOC) may provide access to lower interest rates, though it carries the risk of losing the home if payments are missed according to financial experts.

Health Savings Accounts (HSAs) emerge as a particularly compelling alternative. Offering a triple tax benefit-tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses-HSAs provide a more sustainable solution for managing healthcare costs. Despite these advantages, the Morningstar 2025 HSA Landscape Report reveals that 73% of HSA holders use their accounts exclusively for short-term medical expenses, missing the opportunity to invest for long-term growth. A hypothetical example illustrates the potential: $1,000 invested in an HSA growing at 7% annually for 30 years would accumulate to $7,612, outperforming the same amount in a traditional IRA due to tax-free compounding according to Fidelity analysis.

HSAs also offer flexibility not found in 401(k)s, including no required minimum distributions (RMDs) and the ability to withdraw funds for non-medical purposes after age 65 without penalties according to Morgan Stanley. With the expansion of HSA eligibility under the "One Big Beautiful Bill Act" in July 2025, more individuals-particularly those in direct primary care or telehealth services-can now leverage these accounts to diversify retirement savings according to industry reports.

Conclusion

The growing reliance on 401(k) loans for healthcare and housing expenses highlights a critical flaw in the retirement planning landscape: the prioritization of short-term relief over long-term resilience. While these loans provide immediate liquidity, their structural drawbacks-lost investment growth, double taxation, and job-related risks-pose significant threats to retirement security. Strategic alternatives like HSAs, emergency funds, and personal loans offer more sustainable pathways to address financial stress without compromising long-term wealth. As policymakers and employers continue to refine retirement solutions, individuals must also adopt a more holistic approach to financial planning, balancing present needs with future stability.