How do you withdraw funds from a 401(k) without incurring a penalty?


Quick Answer

Though the IRS imposes a 10 percent penalty on early withdrawals from a 401(k), it waives this penalty for specific situations, such as a hardship or to pay certain medical costs. The IRS does not impose a penalty for withdrawals made after the investor turns 59 1/2.

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Full Answer

In some cases, investors can make penalty-free withdrawals, but must still pay taxes. Withdrawing from a 401(k) early to pay unreimbursed deductible medical expenses that exceed 10 percent of adjusted gross income does not trigger a penalty, as long as the withdrawal occurs in the same year as the medical expenses. The IRS also does not penalize someone who makes an early withdrawal after becoming totally and permanently disabled.

After 12 weeks of unemployment, an investor can make a penalty-free 401(k) withdrawal to pay for health insurance. The IRS does not penalize a beneficiary or estate that withdraws from a 401(k) in the event of the investor's death, but it imposes penalties on a spouse who inherits the IRA and opts to tap into it before turning 59 1/2.

The IRS waives penalties for people who make early withdrawals for income, as long as they take the distribution for at least five years or until they turn 59 1/2, whichever is longer, and as long as they pay taxes on the withdrawals as they would ordinary income. For example, the IRS would not penalize a 54-year-old who withdraws $5,000 from his 401(k) for income, as long as he withdraws $5,000 for five years or until he turns 59 1/2 and pays taxes on the withdrawals. An investor also can withdraw from his 401(k) early to pay unpaid taxes, and in some cases, the IRS does not tax early withdrawals made to buy a first home.

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