11 Ways to Withdraw Money From Your 401k Without Penalty

Learn the 401k withdrawal rules for withdrawing money early without penalties.

When life tosses financial curve balls your way, you might consider cashing out your 401k. Individuals who are under the 401k withdrawal age of 59 and a half and make an early withdrawal will usually pay income tax, plus a 10 percent 401k withdrawal penalty, which has some strict exceptions. Even a hardship withdrawal for disaster relief might still be subject to penalty, which is why it’s important to understand the qualifying exceptions for receiving penalty-free distributions found in Section 72t of the tax code. Here’s what you need to know about withdrawing from your retirement plan without paying penalties.

How to Withdraw From a 401k Without Penalty

  1. Check in with your plan administrator. The administrator can help guide you through the process.
  2. Review your plan agreement. Read the fine print.
  3. Confirm your situation qualifies for a penalty-free exception. Check the IRS website to learn about exceptions to penalty tax on early distributions.
  4. Your plan administrator files IRS Form 1099-R and sends one to you for end-of-year tax filing.
  5. File other IRS forms. File IRS Form 5329, related to additional taxes on qualified plans. Report your IRA withdrawal on IRS Form 1040.

Related: How to Roll Over Your 401k

How to Withdraw From a Traditional IRA Without Penalty

  1. Contact the financial institution holding your IRA. Determine their internal process for withdrawing from your IRA.
  2. Confirm your situation qualifies for a penalty-free exception. These are listed in the Traditional IRA section of Publication 590-B.
  3. IRS Form 1099-R. Your financial institution or plan administrator files IRS Form 1099-R and sends one to you for end-of-year tax filing.
  4. File other IRS forms. File IRS Form 5329 and report your IRA withdrawal on IRS Form 1040.

How to Withdraw Money From a Roth IRA Without Penalty

  1. Contact the financial institution holding your Roth IRA. Determine their internal process for withdrawing from your Roth IRA.
  2. Confirm your situation qualifies for a penalty-free exception. These are listed in the Roth IRA section of Publication 590-B.
  3. IRS Form 1099-R. Your financial institution or plan administrator files IRS Form 1099-R and sends one to you for end-of-year tax filing.
  4. File other IRS forms. File IRS Form 5329 and report your IRA withdrawal on IRS Form 1040.

11 Ways to Withdraw Penalty-Free Funds From a Retirement Account

Check out these penalty-free IRA and 401k withdrawal situations to see if one applies to you.

1. 401k Loan

Current 401k withdrawal rules allow you to borrow from your 401k at no penalty as long as you pay back the funds with interest within five years — or longer if you use the loan to buy a primary residence. Although, not every plan sponsor offers this loan provision.

See: 5 Reasons to Avoid 401k Loans

2. Leaving Your Job After Age 55

Qualified workers who separate from service with their employer in or after the year they reach age 55 — or age 50 if you were a qualified public safety officer such as police, firefighters, government emergency service personnel — can withdraw from a company retirement plan penalty-free.

If you are considering emptying your 401k after a job change, consider a 401k rollover to IRA. The rollover is tax-free and you continue the tax-sheltered growth for your retirement assets.

3. 401k Distribution of Dividends from an Employee Stock Ownership Plan

Dividends distributed from an ESOP are penalty-free. But, this exception only applies to the dividends, not principal.

4. 401k Withdrawal to Comply with a Qualified Domestic Relations Order

Courts can order the division of a 401k plan under a QDRO as part of a divorce. Distributions under a QDRO are exempt from the early withdrawal penalty.

5. IRA and 401k Withdrawal to Pay for Medical Billing

You can make a penalty-free withdrawal to cover healthcare expenses as long as you have unreimbursed medical expenses that exceed 10 percent (7.5 percent if you’re over age 65) of your annual income.

6. IRA Withdrawal to Pay for Health Insurance Premiums

If you are unemployed, you can pay health insurance premiums with funds from your IRA at no penalty.

7. IRA and 401k Withdrawal to Pay for Disability Distributions

You can make penalty-free withdrawals if you are totally and permanently disabled. You are considered disabled if a doctor certifies that you can’t do any substantial gainful activity indefinitely or expected to continue until death.

8. Qualified Military Reservist Withdrawal from a 401k and IRA

Distributions taken by qualified reservists called to active duty for 180 days or more aren’t subject to the penalty while on duty.

9. IRA or 401k IRS Tax Levy Penalty Exception

The IRS can levy your assets, including your retirement accounts, if you owe unpaid taxes. An IRS levy on your retirement account will be penalty-free, but this only applies to IRS levies, not to personal withdrawals to pay your taxes.

10. IRA Withdrawal for Qualified College Costs

You can avoid early withdrawal penalties on IRA distributions for post-secondary education costs like tuition, books, and, if the student is enrolled at least half-time, room and board. The student can be you, your spouse, your children or grandchildren.

If you can afford to only fund either an IRA or a 529 plan, consider funding the IRA. If you need that money for college you can withdraw without a penalty, but if not, it’s safe for your retirement.

11. IRA Withdrawal for First-Time Home Purchase

Qualified first-time homebuyers may withdraw up to $10,000 penalty-free from an IRA toward the purchase of a home. You can use the withdrawal for you and your spouse, parent, child or grandchild. The $10,000 limit is for your lifetime — and for all beneficiaries.

Early withdrawals from your retirement plan might not be the best option for your situation, even if you qualify for a penalty-free distribution. It’s a good idea to take advantage of the expert guidance of a financial advisor as you make this tough financial decision.

Keep Reading: 401k Withdrawal Tips to Help You Retire Early