Fidelity, AARP warn on early 401(k) withdrawal costs

May 26, 2026

Summary

Fidelity and AARP said early 401(k) withdrawals can cut payouts by 25% to 35% and reduce long-term retirement growth.

Why this matters

The article outlines the taxes, penalties, and long-term trade-offs tied to early 401(k) withdrawals. It also highlights alternatives, including 401(k) loans, emergency savings, and the Rule of 55 for some workers.

Fidelity and AARP said workers should understand the full cost of taking money from a 401(k) before age 59 1/2, when withdrawals are generally subject to income taxes and a 10% penalty, meaning you could lose 25% to 35% of what you take out.

For example, a $20,000 withdrawal might net you only $12,000 to $14,000 after taxes and penalties.

The IRS said distributions before age 59 1/2 are subject to the additional 10% tax unless a specific exception applies.

One exception is the Rule of 55, which may allow penalty-free access to a former employer’s workplace plan for workers who leave a job in or after the year they turn 55. The IRS said it does not apply to IRA rollovers, and income taxes still apply.

Vanguard’s 2026 report said about 6% of 401(k) participants tapped their accounts early for financial hardship in 2025, up from 5% in 2024.

Both organizations said early withdrawals also carry a less visible cost: lost long-term growth after money leaves a tax-advantaged account.

They pointed to alternatives that may help preserve retirement savings. Depending on plan rules, a 401(k) loan lets workers borrow against an account balance rather than remove the money permanently. AARP also recommended building an emergency fund, with advisers generally suggesting three to six months of living expenses in a liquid account.

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For example, a $20,000 withdrawal might net you only $12,000 to $14,000 after taxes and penalties.

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Vanguard’s 2026 report said about 6% of 401(k) participants tapped their accounts early for financial hardship in 2025, up from 5% in 2024.

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