Waiving 10 Percent Penalties on a 401(k)

Withdrawing money from your 401(k) may incur a penalty.

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A 401(k) is an employer-sponsored retirement plan that allows you to grow savings tax-deferred until you withdraw the money. The Internal Revenue Service makes the tax rules for these accounts, and in exchange for deferring taxes requires you to keep the money in the plan until you reach the age of 59 1/2. Withdrawals before this time incur a 10 percent penalty, with some exceptions.

Qualified Medical Expenses

The IRS waives the 10 percent early-withdrawal penalty if you use the money to pay unreimbursed medical expenses. These expenses must be greater than 7.5 percent of your adjusted gross income for the year in which you made the 401(k) withdrawal.

Support Orders

You may use 401(k) money to meet court-ordered support payments penalty-free. These payments must be the subject of a Qualified Domestic Relations Order, a decree or order that has been issued by a court most often in a divorce, that specifically authorizes withdrawal of funds from the 401(k). The money pays child support, alimony or a property settlement as reached in a marital settlement agreement.


You are also qualified to withdraw money from your 401(k) without the 10 percent penalty if you are deemed permanently disabled. The IRS requires the finding of disability to be made by a state or federal agency, such as the Social Security Administration. The disability can be either mental or physical, and must be permanent. Temporary illness or an injury from which you are expected to recover do not quality as disabilities covered by your 401(k) monies.

Automatic Contributions and Early Retirement

If you enroll in a 401(k) plan that sets up automatic contributions from your paycheck, and then withdraw the money within 90 days of your enrollment, the IRS will waive the early-withdrawal penalty. In addition, if you decide to retire or leave your job for any reason at age 55 or older, or in the calendar year in which you turn 55, the penalty is waived for any 401(k) plans with your current employer. Other 401(k) accounts from previous employers are not covered by this exception, and this is a good reason to rollover 401(k) accounts whenever you change jobs.

Other Circumstances

The IRS also allows 401(k) withdrawals penalty-free in the event of your death, and when the payments are made to your designated beneficiary. If you are behind in taxes and the IRS levies your 401(k), the early-withdrawal penalty does not apply. In addition, military reservists called to active duty after September 11, 2001, may withdraw 401(k) funds without paying the 10 percent extra to the IRS.