In order to avoid the 10 percent penalty for withdrawing from a 401(k) early, supply the IRS with proof from a physician that a disability is total and permanent, states Forbes. Another way is to show proof of disability payments from Social Security or insurance, according to Bankrate.
Total and permanent disability means that a condition prevents an individual from working for at least a year, or it can eventually cause death, reports Forbes. When applying for the withdrawal, make sure the paperwork from an employer lists the withdrawal as being for hardship purposes. Though the IRS may waive the penalty, money withdrawn from a 401(k) before the age of 59 1/2 is subject to income taxes, and the individual can expect to receive an 1099-R.
Roth 401(k) plans are different in that the funds can be withdrawn penalty-free and tax-free after five years, but only if the employer permits, as stated by Bankrate. If an individual is unable to prove total and permanent disability, but he plan to use the funds for medical expenses that exceed 10 percent of his income, that also eliminates the penalty. In those cases, money must be withdrawn in the same year that the medical expenses were incurred.