Early IRA and 401(k) Withdrawals: What to Know

Traditional exceptions to the early withdrawal penalty include (1) disability, (2) reaching age 59.5, (3) to cover certain unreimbursed medical expenses, (4) separation from service after reaching age 55 (for employer-sponsored plans), (5) distributions that satisfy the “series of substantially equal periodic payments (SEPP)” rules or (6) death.

Hardship distributions provide another way for 401(k) participants to access retirement funds. The terms of the specific plan will govern the types of distributions that are permitted. In the most general terms, participants can take a hardship distribution to cover “an immediate and heavy financial need.”

The amount of the distribution can cover only the amount of the need, and while the need can be created because of financial liabilities incurred voluntarily, consumer purchases generally don’t quality. While hardship distributions may be permitted, they also may be subject to the 10% early withdrawal tax unless a specific exception applies. Note that hardship distributions cannot be repaid.

Qualified plans can also permit a participant to take a nontaxable loan. If the participant repays the loan according to the terms of the agreement, the loan will not generate taxes and penalties.

New and Less Common Exceptions

For tax years beginning in 2024, the Secure 2.0 Act allows 401(k) and IRA participants to take emergency distributions from retirement savings accounts without penalty, limited to $1,000 each year. Also, taxpayers who take emergency distributions can repay them within a three-year period; otherwise, they will be prohibited from taking another $1,000 distribution during the following three-year period.

The IRS also often allows repayable distributions for taxpayers dealing with the aftermath of federally declared disasters. The Secure 2.0 Act created provisions to allow penalty-free distributions to cover up to $2,500 in long-term care insurance premiums this year. Taxpayers dealing with the cost of a qualified birth or adoption can also access up to $5,000 in penalty-free withdrawals that can be repaid within a three-year period.

Some exceptions apply only to IRAs. Taxpayers who have yet to reach age 59.5 may be able to tap IRA savings without penalty to cover the costs of higher education. This penalty-free withdrawal option is available only to IRA owners and not to participants in company-sponsored plans, such as 401(k)s. Qualifying education expenses include such items as tuition, fees and books.

IRA owners can make penalty-free withdrawals for purchasing a first home. This exception is limited to IRA withdrawals of $10,000 or less.