Emergency IRA and 401(k) Withdrawals

An IRA and 401(k) are designed as a tool for retirement planning, but investors sometimes face unexpected financial situations that lead them to consider withdrawing funds early. If your circumstances require you to tap into your retirement savings account, know that you are not alone. According to a recent study, 41% of Americans have taken an early withdrawal.¹

IRA and 401(k) accounts are essentially a deal with the government. In exchange for investing for retirement, the government allows preferential and/or deferred tax treatment. Most distributions from these types of accounts before the age of 59½ are considered “premature” and are subject to an extra 10% early withdrawal tax.

So, you may be asking: Is it possible to avoid the 10% early withdrawal tax? ² Knowing and navigating these rules may help you avoid substantial additional taxation.

IRA and 401(k) Early Distribution Penalty Exemptions

The following are considered qualifying exemptions for the 10% early distribution penalty:

Age. Withdrawals after the age of 59½.
Death. It may be uncomfortable to think about, but it is worth knowing that any withdrawals after the death of the account holder are not subject to penalty.
Disability. Total and permanent disability of the account owner.
“Substantially equal periodic payments.” Under Rule 72(t), setting up substantially equal periodic payments for your life expectancy (or your designated beneficiary).³
IRS levy. Do you owe the IRS money? You may be able to cover unpaid taxes using a penalty-free withdrawal.
Medical. This includes unreimbursed medical expenses in excess of 10% of your adjusted gross income (AGI).
Military. Qualifying distributions to military reservists during active duty.
Rollovers. Must be properly executed within 60 days.
Natural disaster. Some natural disasters are covered by temporary, event-specific legislation that allows penalty-free withdrawals on a case-by-case basis.⁴

IRA Early Distribution Penalty Exemptions

Education. Including tuition, books, supplies, and other qualifying education expenses for you, your spouse, your children, and your grandchildren.
First-time homebuyers. May withdraw up to $10,000 without penalty.
Health insurance premiums. Premiums incurred during a period of unemployment.

401(k) Early Distribution Penalty Exemptions

Separation from service. If separated from service after age 55 (age 50 for certain qualifying governmental public safety employees).

401(k) Loans. If allowed by the plan, with a loan you borrow money from your 401(k) and agree to repay it, typically with interest, over a set period.⁵ With 401(k) loans, you’re required to repay the loan, with interest paid back into your account, usually through payroll deductions. So you’re essentially paying yourself. However, the opportunity cost of having that money out of the market could outweigh the benefits. Lastly, you can only borrow up to 50% of your vested account balance or $50,000, whichever is less. If you have a small balance, this might limit the amount you can access, making a loan less helpful in a major financial emergency.⁶ If you leave your job, the loan must typically be repaid in full within a short time frame, or it will be treated as an early withdrawal subject to taxes and penalties.
Secure Act rules on 401(k) early withdrawals. A 2024 provision allows individuals to make penalty-free annual withdrawals to cover personal emergency expenses up to $1,000 once each calendar year without penalty. You will still have to pay ordinary income taxes on the withdrawal. You only need to self-certify in writing to your employer that the withdrawal is necessary due to an emergency. The IRS defines an emergency expense as unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. General examples include medical expenses, financial needs related to car repairs, imminent foreclosure or eviction from a primary residence, an accident or loss of property due to casualty, or the need to pay for burial or funeral expenses or any other necessary emergency personal expenses.⁷

Do It the Right Way!

Documentation is important. Make sure that you save all records and talk to the right people, such as your office human resources department and your financial professional. Hardship withdrawals may require proof at tax time. It’s important to also keep in mind that any dollar withdrawn is a dollar that won’t grow or be available during your retirement.

Steady progress is important, starting with re-filling your emergency fund and paying off any high-interest debt. When you’re able, scale back your expenses and set up automatic deposits to ensure that money is going back into your investment account.

Are you still thinking about making an early withdrawal? Whether your withdrawal is exempt from penalty or not, a conversation with a financial professional might be the right place to start.