Fidelity Investments and AARP are warning Americans against tapping retirement accounts early, saying growing financial pressure is pushing more workers to treat 401(k)s like emergency savings accounts despite steep long-term costs.
According to guidance cited by AARP, workers who withdraw money from a 401(k) before age 59½ can lose 25% to 35% of the withdrawal to taxes and penalties alone. AARP cited an example where a $20,000 withdrawal could leave savers with only $12,000 to $14,000 after deductions.
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The larger concern, however, is the loss of long-term compounding. Money removed from retirement accounts no longer grows tax-deferred over decades, potentially reducing retirement balances significantly over time. Financial planners warn that the long-term growth lost from early withdrawals can ultimately cost savers far more than the initial taxes or penalties.
The IRS generally treats withdrawals before age 59½ as early distributions subject to a 10% penalty unless specific exceptions apply, while financial experts warn the long-term compounding loss begins as soon as the money leaves the account.
