Fidelity, AARP flash warning sign over 401(k) plans: ‘You could lose 25% to 35%.’ Here’s the big risk Americans face (and how to solve it)

The math is brutal.

“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.

“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.

Why this matters now

The Internal Revenue Service’s 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 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.

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.

One way to protect yourself is by building out an emergency fund to avoid tapping into your retirement funds in the first place. As a general rule, advisors recommend between three and six months’ worth of living expenses set aside in a highly liquid checking or high yield savings account. But some gurus — like Suze Orman — suggest three to five years, which can be difficult to set up.

If you are forced to make a hardship withdrawal, the cost can be severe and have long-term consequences on your retirement savings.

This is exactly why senior-focused advocacy organizations like AARP exist. Fees collected from members enables the team to push lawmakers and regulators to protect seniors and savers. Members also get access to the latest news and analysis to stay up-to-date with all the changes to IRS rules, Social Security and retirement planning.

AARP members get access to guides that can help you make the most of Social Security, choose the right Medicare plan and uncover other government benefits — potentially saving you thousands.

Sign up with AARP today and get 25% off your first year.

Advocacy, research and smarter planning all move the needle, but they can’t fully insulate your household from a job loss, medical bill or market shock. For that, you need an investment strategy designed to handle emergencies in the most tax-efficient way possible.

Creating a tax-efficient safety net

One way to avoid early retirement withdrawals, according to the AARP, is a simple 401(k) loan. By borrowing against your assets, instead of liquidating them, you avoid the tax hit and the growth interruption.