‘You could lose 25% to 35%.’ AARP warns Americans about making this 401(k) move. Here are 4 alternatives to consider

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Tapping into your 401(k) early to deal with debt or emergency bills may seem like a savvy move, but two of the biggest names in retirement planning are sounding the alarm about doing so.

Fidelity, one of the largest 401(k) plan administrators in the country, and AARP, the nation's leading advocacy group for older Americans, are both warning workers that early withdrawals can wipe out a significant chunk of their savings overnight.

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"When you withdraw from a 401(k) before age 59-and-a-half, you may owe ordinary income taxes plus a 10 percent penalty, meaning you could lose 25 to 35 percent of what you take out," said BetterWallet's Marc Russell, according to AARP (1).

"Translation: A $20,000 withdrawal might net you only $12,000 to $14,000 after taxes and penalties," AARP added.

Not only are you losing thousands of dollars, but you're also giving up the opportunity for that money to grow over time and be available tax-free after you hit a certain age.

For those focusing exclusively on their retirement accounts, this could be a massive risk. And it's worth monitoring now more than ever.

The Internal Revenue Service's (2) early or "premature" distributions rule before the age of 59½ is not new. However, the pressure to break the rule has recently increased. The rising cost of living has pushed many Americans to consider any source of funding available, including early withdrawals from their retirement accounts.

Vanguard's How America Saves 2026 (3) reported a noticeable uptick in the number of hardship withdrawals workers took last year. Roughly 6% of 401(k) plan participants tapped their retirement accounts early to deal with financial hardship in 2025, up from 5% in 2024.

"Hardship withdrawals have also been increasing, affecting 2.5% of workers in 2025," according to Fidelity's Building Financial Futures: Q4 2025 report (4).

For pre-retirees, breaking the 59½ rule and putting up with the 10% penalty may seem like a small price to pay to combat current financial stress.