{"id":22712,"date":"2025-12-23T03:44:32","date_gmt":"2025-12-23T03:44:32","guid":{"rendered":"https:\/\/incredipros.com\/?p=22712"},"modified":"2025-12-23T03:44:35","modified_gmt":"2025-12-23T03:44:35","slug":"how-to-take-penalty-free-withdrawals-from-your-ira-or-401k","status":"publish","type":"post","link":"https:\/\/incredipros.com\/?p=22712","title":{"rendered":"How To Take Penalty-Free Withdrawals From Your IRA Or 401(k)"},"content":{"rendered":"
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When unexpected expenses pile up and the emergency fund runs dry, where can you turn for money? For many people, their biggest stash of savings is hidden away in retirement plans, such as IRAs and 401(k)s.<\/p>\n

But if you withdraw money from a 401(k) or IRA before turning 59\u00bd, generally you\u2019ll pay an extra 10% as a penalty. That\u2019s on top of the income taxes you\u2019ll owe.<\/p>\n

Luckily, there are some exceptions, such as for certain hardships, that allow for penalty-free withdrawals. You\u2019ll usually still owe income taxes, but at least you\u2019ll avoid the 10% penalty.<\/p>\n

1. Unreimbursed medical bills<\/h2>\n

The government allows savers to withdraw money from their qualified retirement plan to pay for unreimbursed deductible medical expenses that exceed 7.5% of their adjusted gross income.<\/p>\n

\u201cYou can take a penalty-free withdrawal out of your IRA or 401(k) for the amount that\u2019s above 7.5% of adjusted gross income,\u201d says Carolyn McClanahan, founder of Life Planning Partners in Jacksonville, Fla.<\/p>\n

Say your adjusted gross income is $100,000. Then 7.5% of that is $7,500. If your medical expenses are, say, $10,000, you can withdraw $2,500 \u2014 that is, the difference between your total medical expenses and 7.5% of your AGI\u00a0\u2014 from your IRA penalty-free. (If your medical expenses add up to less than 7.5% of your AGI, you can\u2019t take advantage of this penalty-free exception.)<\/p>\n

To claim your penalty-free withdrawal, you must take the retirement-account withdrawal in the same year that you incurred the medical bills. (You don\u2019t have to itemize deductions to take advantage of this exception to the 10% tax penalty, according to IRS Publication 590.)<\/p>\n

2. Disability<\/h2>\n

The IRS says that investors must be totally and permanently disabled before they can dip into their retirement plans without paying a 10% penalty.<\/p>\n

The easiest way to prove disability to the IRS is by collecting disability payments from an insurance company or from Social Security, says Alan Rothstein, a CPA at Rothstein & Co., in Avon, Conn. That said, the IRS says a letter from a doctor, health-care provider or social-services program is acceptable.<\/p>\n

3. Health insurance premiums<\/h2>\n

Penalty-free withdrawals can be taken from an IRA if you\u2019re unemployed and the money is used to pay health insurance premiums. The caveat is that you must be unemployed for 12 weeks.<\/p>\n

In case of an audit, Rothstein suggests opening a separate bank account to receive transfers from the IRA and then using it to pay the premiums only. \u201cOr, the best way is to have the money sent to the insurance carrier directly,\u201d he says.<\/p>\n

4. If you owe the IRS<\/h2>\n

If you owe unpaid taxes and the IRS puts a levy on your IRA or 401(k) to collect payment, you can make a penalty-free withdrawal from your retirement account to pay the debt.<\/p>\n

5. First-time homebuyers<\/h2>\n

If you\u2019re a first-time homebuyer (defined by the IRS as someone who hasn\u2019t bought a home in the past two years), you can withdraw up to $10,000 from an IRA penalty-free to use as a down payment for a house.<\/p>\n

\u201cIf you want to buy a home and you don\u2019t have the money to buy that home, that IRA is an option,\u201d McClanahan says. \u201cThe big thing is that, even though you don\u2019t have penalties, you do have to pay income tax.\u201d<\/p>\n

For example, if you\u2019re in a 22% tax bracket and you withdraw $10,000 for your first home, you\u2019ll owe $2,200 in taxes.<\/p>\n

Generally, while your 401(k) plan may allow you to withdraw down-payment funds as part of a hardship withdrawal, you\u2019re going to owe the 10% penalty if you\u2019re younger than 59\u00bd. You could avoid the penalty by asking for a 401(k) loan. But that comes with other risks. <\/p>\n

\u201cThe problem with borrowing against your 401(k) is that, if you lose your job and you can\u2019t put the money back, you have to pay income tax and a penalty on that,\u201d McClanahan says. \u201cSo, I tell people to be very careful about borrowing against your 401(k) because you have to pay it back at some point and if you lose your job before you can pay it back, then you\u2019re going to be hit, not just with taxes, but with a penalty.\u201d<\/p>\n

6. Higher education expenses<\/h2>\n

Similar to a down payment to buy a home, IRA withdrawals for higher education are penalty-free if used to pay for qualified expenses.<\/p>\n

What\u2019s more, it doesn\u2019t just have to be for your education, it can be for a family member.\u00a0<\/p>\n

\u201cYou can take [money] out for your spouse, you, your grandchildren, your children, but it has to be at an institution that\u2019s accredited,\u201d McClanahan says. \u201cSo, you can\u2019t take a yoga class and call it higher education.\u201d<\/p>\n

You can take money out of your 401(k) for higher education expenses in two ways:<\/p>\n