How to Waive 401(k) Early Withdrawal Penalties

Avoid the early distribution penalty with a hardship withdrawal or 401(k) loan.

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The only way to take money from your 401(k) distribution before you reach age 59 1/2 is with a hardship withdrawals. Despite the name, however, such withdrawals are still subject to a 10 percent penalty, in addition to income taxes owed, except in a few circumstances. Hardship withdrawals apply to medical expenses, funeral expenses or college tuition for yourself or a dependent, down payment on a home or any payments to a financial institution to avoid foreclosure on your current home. The penalty can be waived for a few specific situations, but if you need money for other reasons or don't meet the waiver requirements, there are alternatives to an early withdrawal.


The 10 percent penalty is waived if medical expenses exceed 7.5 percent of your adjusted gross income, you are permanently disabled, a military reservist, your retirement plan is levied by the IRS or due to divorce or death of the plan participant. If your plan includes dividends from an employee stock ownership program or you take the distributions as an annuity payment, you also qualify for the waiver. You'll still have to pay any tax owed on the distribution and you can't make additional contributions for six months after the withdrawal.

Tax Forms

If you receive a hardship withdrawal, your financial institution will send you a 1099-R form showing the amount taken and indicating the reason for the penalty waiver in box 7. If you are eligible for a waiver but the 1099-R does not indicate an exception code, you must file Form 5329 to claim the exception. The withdrawal is reported as income on your federal and state tax returns.


A 401(k) loan may be a better option than a hardship withdrawal, especially if you need the money for a reason other than those permitted by the hardship withdrawal rules. Your employer handles the paperwork, not the IRS. You'll pay interest on the loan, which helps make up any lost earnings on the principal, but it won't be a permanent hole in your retirement savings. If you fail to pay back the loan by the deadline or you leave your job before paying it back, you will owe tax on the remaining amount and the 10 percent penalty if you are younger than 59 1/2. Many companies do not allow 401(k) loans, so be sure to check if your employer offers this option.

IRA Rollover

If you are in a situation where you can move money out of a 401(k), such as changing jobs, consider rolling over the amount you need to withdraw into an individual retirement account. The rules for waiving the early withdrawal penalty for IRAs are slightly more lenient. In addition to the eligible uses of 401(k) withdrawals, you can use IRA money for medical insurance premiums, or take withdrawals as annuity payments without the penalty. You still will owe any other tax due on the distribution. Additionally, if you are disabled or a military reservist, you may take early distributions from an IRA for any reason, with no penalty.

Other Considerations

An early withdrawal from either a 401(k) plan or an IRA generally means you are spending retirement principal now. You can't put the funds back later when your financial situation improves, the way you can with the 401(k) loan program. Distributions are subject to 20 percent federal withholding, so you won't be able to spend the full amount of the withdrawal. The closer you are to retirement age, the more difficult it will be to catch up on your retirement savings, so consider all options.