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Exceptions to the 10% Early Withdrawal Penalty from IRAs and 401(k)s

English: A clock made in Revolutionary France,...

English: A clock made in Revolutionary France, showing the 10-hour metric clock. (Photo credit: Wikipedia)

When you take money out of your IRA or 401(k) plan (or other qualified retirement plan, such as a 403(b) plan), if you’re under age 59½ in most cases your withdrawal will be subject to a penalty of 10%, in addition to any taxes owed on the distribution.  There are many exceptions to this rule though, and the exceptions are not the same for all types of plans.  IRAs have one set of rules, and 401(k)s have another set of rules.

The exceptions are always related to the purpose for which the money was withdrawn.  The exact same dollars withdrawn do not have to be used for the excepted purpose, just that the excepted expense was incurred.

IRA Exceptions

It is important to know that all distributions from your traditional IRA are subject to ordinary income tax, but some distributions are not subject to the early withdrawal penalty.  The list of exceptions for early withdrawals from IRAs is as follows:

Death of the owner of the IRA – if the owner of the IRA dies, the beneficiaries of the IRA can (in fact, must) take withdrawals from the plan without paying the 10% penalty.

Total and permanent disability of the owner of the IRA – if the owner of the IRA is deemed to be totally and permanently disabled.   You are considered disabled if you can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long, continued, and indefinite duration.

SOSEPP – With a Series of Substantially Equal Periodic Payments, lasting at least five years or until age 59½ (whichever is longer), there is no 10% penalty applied.

Medical Expenses – if you have medical expenses greater than 7.5% of your Adjusted Gross Income, a distribution from your IRA to cover these expenses (the excess above 7.5% of AGI) will not be subject to the penalty.  Any amounts paid by insurance toward the medical expenses reduces the overall expense counted toward the excepted expenses.

Health Insurance Premiums – if you’re unemployed, you can take a distribution from your IRA to cover your health insurance premiums without paying the penalty.

Qualified higher education expenses – amounts withdrawn from your IRA to pay for tuition, fees, books, supplies, and equipment needed for enrollment or attendance of a student at an eligible higher education institution are not subjected to the penalty.  In addition, if the student is at least a half-time student, room and board expenses paid for with an IRA distribution would not be subject to the penalty.  The amount of education expenses is reduced by any scholarships, grants, and qualified 529 plan distributions; any amount applied to an IRA penalty exception is also not eligible to be used toward education credits, such as the American Opportunity Credit or the Lifetime Learning Credit.

First-time home purchase – amounts withdrawn from your IRA up to $10,000 that are used toward a qualified first-time home purchase are an exception to the penalty.

Qualified reservist distributions – if a reservist who is called to active duty after September 11, 2001 for a period of 179 days or more takes a distribution from an IRA (after the start of active duty and before the end of active duty) the distribution will not be subject to the 10% penalty.

Rollovers – both direct, trustee-to-trustee transfers and 60-day indirect transfers are exempted from the penalty.

Excess contributions – if you have contributed too much to your IRA, you can take out the excess contribution without penalty.  However, any growth that is attributed to the amount that you over-contributed will be subject to the 10% penalty and taxes when withdrawn.

401(k) Exceptions

As with the IRA, most withdrawals from a 401(k) or other qualified retirement plan are subject to taxation.  Early withdrawals before age 59½ are also subject to a 10% penalty, with some exceptions.  The exceptions are as follows:

Death of the participant – this is the same as the exception for an IRA above.

Total and permanent disability of the participant – same as with an IRA.

SOSEPP – same as with an IRA.

Medical Expenses – same as with an IRA.

Qualified reservist distributions – same as with an IRA.

Rollovers – same as with an IRA.  However, an indirect 60-day rollover (not a trustee-to-trustee transfer) is subject to mandatory 20% withholding.  If the withheld 20% is not transferred within 60 days, this amount may be subject to both taxation and the 20% early withdrawal penalty.

Corrective distributions – just like with an IRA, if you have contributed too much to your 401(k), you can take out the excess contribution without penalty. However, any growth that is attributed to the amount that you over-contributed will be subject to the 10% penalty and taxes when withdrawn.

Separation from service after age 55 – if you leave employment after the age of 55, you are eligible to take distributions from your 401(k) or other QRP without penalty.  This is only valid while the funds are still in the 401(k) – if you rollover the funds to an IRA, this option is no longer available.  If the participant is a public safety employee (police, fire, or emergency medical technicians), the age is 50 or older.

Qualified Domestic Relations Order (QDRO) – in the event of a divorce, if the 401(k) is to be divided or distributed to the ex-spouse of the participant, withdrawals from the plan by the ex-spouse are not subject to the 10% penalty.

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  1. Mickey says:

    If I have been separated from my employer after 31 years of service with them, I understand I can get my 401k without penalty. My question is …if I have to purchase a home bc my ex wife has possession of my 1st home I purchased and we have been divided for 6 years, will this offset the amount that I will have to pay in taxes when I file.? I will have to do this bc I am still having to pay on her mortgage and now unemployed.

    1. Mickey says:

      I turned 55 in March this year

    2. jblankenship says:

      In order to answer that question I’d need to see your tax return – last year’s and a projection for this year. I suggest that you talk to your tax preparer to get an understanding of the tax impact of withdrawing funds from your 401k in light of your home purchase.


      1. Mickey says:

        Well the projected amount of myself and now wife would put us at around 70,000 plus the 401k would be another 70,000, so that will throw us into a higher tax bracket I’m sure. Just wondering if it would be best to wait to get the 401k till after January since I will only be drawing unemployment then and would not have to file it till the next tax time. My main question is if buying a home would give us enough of a deduction to help out on the taxable amount.

        1. jblankenship says:

          I don’t know the answer to that without more detail, and the level of detail required is beyond the scope that is appropriate for this public forum.


  2. Dann says:

    Hi, I was unemployed and then had major surgery on a shoulder due to injury. I spent 6 months immobile in a sling which was then followed by therapy. So I wasn’t working.

    Then a parent spent a long time in the hospital where I visited 24/7 before passing away.

    So it has been several years without working and I went thru the savings very quickly. I thought my only option to pay the last two years tax bill was to withdraw from an IRA (pre-59 1/2 yrs old). Now I am facing the tax and the penalty. Isn’t there any provision for someone such myself – not to be penalized?

    Thank u.

    1. jblankenship says:

      Unfortunately I don’t think so. If you had high medical expenses (above 10% of your AGI) during the period then those expenses might qualify for some relief, plus your medical insurance coverage while unemployed would apply as well. Otherwise, that’s all I can think of that might help you out.


      1. Dann says:

        OK Thank you. Maybe I just shouldn’t have withdrawn the $ and not paid the IRS on time.

  3. Brian says:


    If I separate from my current company at age 57 and have a 401K, can I access the 401K balance at any point in the future if I should need it? As an example, I don’t need it for the first 6 months after leaving but I encounter a financial situation 6 or 9 months after leaving. Can I withdrawal as much or little as I need at that time to address the financial need? Must you commit to accessing the 401K or a specific amount of the 401k (i.e. equal minimum payments) at the time you separate or leave the employer or can you delay accessing the funds until it is truly needed?

    1. jblankenship says:

      Brian –

      Unless your 401k administrator has special rules regarding amounts and timing of withdrawals, there is no reason why you can’t wait as long as you like and take as much or as little as you want from the account.


  4. Frankie says:

    In light of the current trend in the market, is it possible to remove all earnings and say, put upon the mortgage of a house? Assuming that the homeowner is over 59 1/2 and would still involved in deductions at work, is there a penalty for such purpose? I know that most professionals would say not to do that but with the past, we all know someone that lost a lot of money not so long ago. Would it be prudent to pay the taxes involved in order to decrease the principle and increase the equity of your home at this time? This news of the market from the past year indicate we are in for a helluva ride!

    1. jblankenship says:

      Frankie –

      If you’re talking about a plan at your current employer, most of these plans do not allow in-service distributions. This means that you would have to be no longer employed by that employer in order to take a distribution from the plan.

      IF your current plan administrator allows an in-service distribution, then you’d have to work the numbers against the tax hit that you’ll definitely receive, versus the potential (and not definite) losses you’d experience by staying invested, and comparing the outcome to the benefit of not having a mortgage to pay. It’s a complicated question – really beyond the scope of what I can cover here in the comments.


  5. Diana says:

    I’m 47 and have been retired from my job since 2011. I was hurt at work and I’m on a disability pension and collect Social Security disability. I need to withdraw some money out of my 401. If I’m reading this correctly, I can withdraw without paying a penalty. Is this generally the rule or do they make it difficult to withdraw your money without paying the penalty?
    Thank you in advance for your time in answering my question.

    1. jblankenship says:

      Diana – I suggest talking to your plan administrator to get an understanding of the “hoops” that you may need to jump through in order to withdraw under the disability exception. I doubt if it’s terribly difficult, but each plan is different.


  6. Barry says:

    On the 401(k) exceptions, I believe your eligible if you leave your job at anytime during the calendar year in which you turn 55 according to Pub 575, but you can’t actually take the distribution until after turning 55?

    1. jblankenship says:

      That is right, Barry – the separation from service can occur at any time during the calendar year when you’ll reach age 55 (50 for public safety employees), and as long as the distributions occur after you’ve actually reached age 55 there will be no penalty. This is only from QRPs, not from IRAs.


  7. clydewolf says:

    Good information all in one place! Thank you.

    A question about the medical expenses exceeding 7 1/2 % of a taxpayer’s AGI,
    Will the PPACA (obamacare) increase of the medical deduction increase the threshold for the exemption to 10% which is now in place for those under age 65?

    Comment on the “first time home buyer” exemption of the 10% penalty, this is a once a lifetime opportunity. Under the rules, it is possible to be a “first time home buyer” more than once.

    As for distributions from the 401k, typically the taxpayer must separate from the employer that sponsors the 401k before distributions can be made from the 401k.

    1. jblankenship says:

      Good points, Clydewolf.

      I had wondered about the 10% of medical expenses question myself but couldn’t find any definitive information about it. I’ll keep looking and post something when I find out.

      Re: first-time homebuyers, you can be a first-time homebuyer many times in your life, it’s not a one-time deal. If you haven’t had a present interest in a main home for 2 years or more, when you purchase a main home you’re considered to be a first-time homebuyer. Incidentally, that’s different from being a first-time homeboy. Totally different thing! :)


      1. Dan says:

        Question: While you can use the first time home buyers exemption more than once, is it capped at a 10k limit for life? That was my understanding of the exception.

        1. jblankenship says:

          Dan, that’s absolutely correct. Under current law, it is a lifetime cap of $10,000 per individual excepted from penalty for the first-time homebuyer purpose.


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