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

AARP has issued a warning to Americans about the potential financial consequences of withdrawing from their 401(k) accounts before reaching age 59 1/2. Fidelity and AARP, two leading retirement planning organizations, both advise against early withdrawals due to the significant tax penalties and loss of potential growth. According to BetterWallet's Marc Russell, a withdrawal of $20,000 could result in only $12,000 to $14,000 after taxes and penalties.

The Internal Revenue Service's rule on premature distributions applies to withdrawals before age 59 1/2, but the pressure to take advantage of early funds has risen due to the rising cost of living. Roughly 6% of 401(k) participants made hardship withdrawals in 2025, up from 5% in 2024. Breaking the 59 1/2 rule may seem like a small price to pay for financial relief, but it could jeopardize long-term savings.

Building an emergency fund is recommended to avoid tapping retirement funds, and high-yield accounts can help preserve the purchasing power of uninvested cash.