Withdrawing IRA or 401(k) Money Early? 8 Ways To Avoid Penalties


Times are tough for many Americans right now. A recession is surely on the horizon, the cost of food continues to rise and mass layoffs are, it seems, only just beginning. Consumers desperate to make ends meet may be wondering, “How can I make a withdrawal from my IRA or 401(k) early without incurring a penalty?”

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Though financial advisors generally caution against early withdrawal, there are ways to take money out of one’s retirement plan early without getting slammed with a penalty. These are eight of the ways you can manage it. 

If You’ve Been Unemployed for 12 Weeks or More (for Healthcare Only)

Mass layoffs are in the air and it’s good to know that if you’ve been unemployed for 12 weeks or more, you can make a penalty-free withdrawal from your IRA — but fine print applies.

“If you’ve been unemployed for 12 weeks or more, you have the ability to make a penalty-free withdrawal from your IRA — provided the money is used to pay for your health insurance premiums,” said Steve Sexton, CEO of Sexton Advisory Group. “It’s critical to keep an organized paper trail of your health insurance premium payments in case you get audited.”

To keep your situation as clean as possible, it is recommended that you send payments directly from your IRA to your healthcare provider.

First Home Purchases

Buying your first home? You can take some heat off the down payment without penalty.

“First-time homebuyers can withdraw from an IRA without penalty if the withdrawal is used to pay for qualified acquisition costs, such as closing costs and down payments,” said  R.J. Weiss, CFP, founder of The Ways to Wealth. “This withdrawal is taxed.”

You can withdraw up to $10,000 from your account without penalty.

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Certain Medical Expenses

Not all medical expenses qualify for a penalty-free withdrawal from one’s IRA, but some do. It depends on the cost and circumstances.

“Medical expenses only qualify for a hardship withdrawal if they exceed 7.5% of the owner’s adjusted gross income,” said Kevin Chancellor, a financial planner/advisor and CEO and founder of Black Lab Financial. “These expenses must also be excluded from the person’s health insurance coverage and be paid for by the participant, their spouse or their dependents.”

Total and Permanent Disability

“If you have a disability, you may be able to withdraw money early from your IRA or 401(k) account without facing the typical 10% penalty fee,” said Carter Seuthe, CEO of Credit Summit. “The IRS allows an exception if you can prove that the withdrawal was due to a disability which prevents you from continuing in your job.”

It is important that you consult your tax specialist first and acquire the necessary documentation detailing your diagnosis that the IRS requires for proof of your total and permanent disability.

“Take advantage of this exception if it applies to you as it can provide much needed access to funds in difficult times,” Seuthe said. “Don’t forget though, even with this exception, withdrawals are still subject to income taxation so make sure to adjust your withholding accordingly.”

Higher Education (but Not Student Loans)

College education costs a fortune. The average federal student loan debt is $37,574 per borrower, and private student loan debt averages $54,921 per borrower, according to the Education Data Initiative.

“One way adults can make it more affordable for themselves or for their dependents is by taking advantage of the allowed exception to withdrawing from your IRA or 401(k) account earlier than you normally could without penalty,” Seuthe said. “Although there will be some taxes to pay on the money you withdraw, it can be well worth it — especially if this allows you to reach your educational goals without having to take out thousands of dollars in student loans. Just make sure you understand all the possible repercussions before taking this step and use this opportunity wisely.”

Note that only direct higher education expenses qualify for penalty-free withdrawals from a traditional IRA or 401(k) account. Student loans and interest payments do not.

Hardship Withdrawals

Hardship withdrawals are a bit complex as they vary from plan to plan, but here’s the gist.

“If you have an immediate financial need, you may be able to take a hardship withdrawal from your 401(k) without incurring a penalty,” said Brian Colvert, CFP, CEO of Bonfire Financial. “According to IRS rules, a hardship withdrawal lets you pull money out of the account without paying the usual 10% early withdrawal penalty charged to individuals under the age of 59½. These withdrawals can be used towards medical expenses, disability, educational expenses, foreclosure prevention and funeral expenses.”

Secure Act 2.0

“Secure Act 2.0 also added a blanked personal emergency withdrawal which will be penalty-free for up to $1,000 a year starting January 2024,” said Robert P. DePalo, Jr., JD, CExPTM, director of business planning at National Financial Network, Inc.

Though this is a fairly new initiative, we do know some specifics.

“Secure Act 2.0 added a penalty-free withdrawal for victims of domestic violence,” DePalo, Jr. said. “A victim of domestic violence can withdraw the lesser of 50% the account value or $10,000. According to the act this is simply a self-certification but does not take effect until after Dec 31, 2023.”

Secure Act 2.0 also added a penalty-free withdrawal for the cost of long-term care insurance.

“This is limited to $2,500 per year for the payment of Long-Term Care insurance,” DePalo, Jr. said. “The insurance must be of high quality as stated in the act but not further explained. This does not take effect until three years after the act was signed on Dec. 29, 2022, so this would be an option starting in 2026, realistically.”


This one should be obvious, but it must be noted. If you die, your IRA and 401(k) monies can be emptied out — free of charge.

“If you pass away, your beneficiary can withdraw money from your IRA or 401(k) without incurring the 10% penalty,” said Michael Ryan, a financial coach.

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This article originally appeared on GOBankingRates.com: Withdrawing IRA or 401(k) Money Early? 8 Ways To Avoid Penalties