Fidelity & AARP 401(k) Warning: You Could Lose 25-35%

Two names most workers trust with their retirement money are saying the same thing at the same time: pulling cash out of a 401(k) before retirement age costs a lot more than the number on the withdrawal slip suggests.

Fidelity, one of the country’s largest 401(k) plan administrators, and AARP, the leading advocacy group for older Americans, have both flagged a rise in early withdrawals and hardship withdrawals in 2025 and 2026. Their warning isn’t about the stock market or picking the wrong fund. It’s about the tax bill that shows up after the money is already spent.

The math behind the warning

Here’s the number that’s getting attention: withdraw money from a traditional 401(k) before age 59½, and you could lose 25% to 35% of it to taxes and penalties combined.

That breaks down into two separate costs:

Ordinary income tax on the amount withdrawn, since traditional 401(k) contributions were never taxed going in
A 10% early withdrawal penalty from the IRS, on top of that income tax, for pulling the money out before 59½

So a $20,000 withdrawal can easily shrink to $12,000-$14,000 after both hit. That’s not a rounding error. It’s the difference between covering an emergency and creating a much bigger one a few years down the road, when that same money would have kept growing tax-deferred.

There are exceptions. The IRS allows penalty-free early withdrawals for a specific list of situations, including certain medical expenses, disability, and a handful of other hardship categories. But the 10% penalty exception doesn’t erase the income tax bill, and plenty of workers assume “hardship withdrawal” means “no cost,” which isn’t accurate.

Why this is happening more often right now

This isn’t a new IRS rule. What’s changed is how many people are breaking it.

Fidelity’s Building Financial Futures: Q4 2025 report found that hardship withdrawals affected 2.5% of workers in 2025. Vanguard’s How America Saves 2026 report shows a similar trend from a different angle: roughly 6% of 401(k) participants took a hardship withdrawal in 2025, up from 5% the year before.

Neither number sounds dramatic on its own. Together, they point to the same thing: more workers are treating retirement accounts as a backup source of cash for the cost of living, medical bills, and debt, not as untouchable long-term savings.

That’s exactly the shift Fidelity and AARP are trying to head off before it becomes a habit rather than a one-time emergency move.

What to do before you touch your 401(k)

None of this means a 401(k) can never be touched. It means it should be the last option, not the first one. A few steps come before that decision.

Build a cash cushion first. Most advisors suggest three to six months of living expenses in a liquid, easy-to-access account, like a high-yield savings account. Some, like Suze Orman, argue for three to five years of expenses, which is a much bigger goal but reflects just how expensive it can be to have no buffer at all.

Check if a 401(k) loan is an option instead of a withdrawal. Many plans let you borrow against your own balance rather than liquidating it. A loan doesn’t trigger income tax or the 10% penalty as long as it’s repaid on schedule, and the money you borrowed keeps growing less than it would if you’d left it alone but far more than if you’d withdrawn it outright.

Confirm whether you actually qualify for a penalty exception. The IRS lists specific hardship categories, including certain medical costs, disability, and a first-time home purchase carve-out for IRAs. It’s worth checking the exact rule before assuming a withdrawal qualifies and before assuming it’s penalty-free just because it’s labeled a hardship withdrawal.

Talk to your plan administrator before deciding anything. Every 401(k) plan sets its own rules for loans, hardship withdrawals, and repayment terms. What applies to a coworker’s plan at a different company may not apply to yours.

The bottom line

The Fidelity and AARP warning isn’t about scaring people away from ever using their own money. It’s about making sure the decision gets made with the real cost in view, not just the number that shows up on the withdrawal confirmation screen. A 401(k) is built to compound for decades. Treating it as a short-term emergency fund is one of the more expensive financial decisions a worker can make, and it’s one that’s a lot harder to reverse than most other money mistakes.