The high cost of tapping your retirement savings early

The 2025 Employee Financial Wellness Report by Payroll Integrations found that a significant portion of the U.S. workforce is experiencing financial strain, which is impacting their retirement savings. The report reveals that 38% of employees have withdrawn money from their retirement accounts, with this trend being particularly prevalent among Gen Z workers, of whom nearly half (46%) have done so. The withdrawals are primarily driven by urgent needs like unexpected emergencies and debt repayment, not discretionary spending.

This pattern is expected to continue, as one in three employees anticipates having to withdraw funds again in the next year to cover emergencies or daily expenses, indicating widespread financial fragility and a lack of sufficient emergency savings.

When bills pile up or emergencies strike, dipping into a 401(k) or IRA can feel like the easiest fix. But the real price of tapping retirement savings early is much higher than most workers realize. Between penalties, taxes, and lost compounding growth, a short-term withdrawal can snowball into a major setback for your financial future.

Here are five reasons why you may want to reconsider taking an early withdrawal from your retirement account:

1. Penalties and taxes add up fast

Most withdrawals before age 59½ carry a 10% early withdrawal penalty plus ordinary income taxes. Let’s say you pull $10,000 from your 401(k):

10% penalty = $1,000 gone immediately.
Federal and state income tax (say 22% federal + 5% state) = another $2,700.

That $10,000 withdrawal leaves you with just $6,300 in cash—a 37% haircut before you even spend a dollar.

2. You sacrifice decades of growth

The real danger isn’t just the penalties—it’s the lost growth from compounding (i.e., your opportunity cost!). If instead of withdrawing that $10,000, you left it invested with an average 7% annual return (close to the historical S&P 500 average), here’s what it could grow into:

After 10 years: $19,672
After 20 years: $38,697
After 30 years: $76,123

That “quick” $10,000 withdrawal could cost you over $76,000 in retirement wealth.

3. Larger withdrawals multiply the damage

Consider someone who withdraws $30,000 at age 35:

After penalties and taxes, they may only pocket about $19,000.
But if invested for 30 years at 7%, that $30,000 could have grown to $228,368.

In other words, that one withdrawal could shrink their retirement nest egg by nearly a quarter of a million dollars.

4. You risk running short in retirement

Nearly half of working households are at risk of not having enough saved for retirement. Fidelity recommends saving at least 15% of your income annually. Every withdrawal pulls you further from that goal, forcing you to either work longer, spend less in retirement, or rely on Social Security alone—which typically replaces only about 40% of pre-retirement income.

5. Alternatives are usually less costly

Before raiding retirement funds, consider these options which may be less costly:

Emergency fund: If you have an emergency fund, now is the time to use it. This is exactly what it’s for. If you don’t have an emergency fund, it is widely recommended by financial experts to prioritize building an emergency fund before or while saving for retirement.
Low-interest borrowing: A personal loan at 8% costs far less than a 37% “effective cost” of a retirement withdrawal.
Expense cuts: Trimming $250/month in nonessentials frees $3,000/year without hurting your future.
401(k) loan: Some 401(k) plans allow you to borrow from your account. While this isn’t without risk, it allows you to pay yourself back with interest, and as long as you make your payments, you generally avoid taxes and penalties. However, be aware that if you leave your job, the loan may need to be repaid in full very quickly.

The bottom line

While an early withdrawal from your retirement account can provide a sense of immediate relief, it comes at a steep price. What looks like a $10,000 withdrawal today could really be a $76,000 mistake tomorrow. The combination of taxes, penalties, and lost future earnings can significantly derail your progress toward a secure and comfortable retirement. By carefully considering all your options, you can make an informed decision that protects your financial future.

It Pays to Know!