How to Withdraw Money Early From Your 401K or IRA Without Paying a Penalty

In the current economic environment, many people are finding it hard to make ends meet or pay for unexpected events requiring large sums of money. In some cases this is forcing people to turn to their retirement accounts to find the necessary funds.

All good personal finance advice says not to touch your 401K or IRA, because you are essentially borrowing against your future. In fact the federal government and IRS have created rules to make withdrawals from these retirement instruments as untouchable as non-liquid assets. For those who do access the funds, there are stiff penalties.

First, you have to pay regular taxes. For the sake of simple math, let’s call the tax rate 30%. (It’s going to be close to that anyway.) Then, there is a 10% penalty on top of the normal taxes. With that in mind, if you were to withdraw $10,000 from your IRA or 401K, after taxes and penalties you would be left with only $6,000, hardly a wise financial move.

In fact it is almost cheaper to borrow money on your credit card in the short term than it is to withdraw funds early from your retirement account.

However, the IRS is not completely heartless and has some withdrawal waivers for emergency or life changing events for which funds cannot be found from other sources.

For those who meet certain criteria, the IRS allows withdraws from a 401K or IRA for certain reasons without paying the 10% penalty. (Sorry, but you can’t get out of paying taxes).

Here’s seven of the most common scenario’s in which you can withdraw from your retirement accounts without paying a penalty:

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Become Totally Disabled

If you become totally disabled and unable to work, you can withdraw money without penalty. In order to claim disability, all of the appropriate documentation will have to be provided including being deemed disabled and unable to work by both a doctor and possibly the state. This is a lengthy process. Often it takes six months to a year.

Medical Expenses

Not all medical expenses qualify. In fact, this exemption is meant for major medical expenses. Before a person can qualify, the medical expenses must reach 7.5% of a person’s gross annual income. For a person who makes $30,000 per year, their medical expenses must reach $2,250 during a single year.

Health Insurance

If you become unemployed, you can use funds from your IRA or 401K to pay for health insurance premiums but only after 12 weeks of continuous unemployment.

60-Day Loan

Do you need a short term loan? The IRS allows a person to withdraw money from their 401K or IRA tax and penalty free providing that amount is repaid within 60 days. This is not the IRS being kind. This rule is designed for those who are moving their retirement accounts to another financial institution.

They assume that it could take up to 60 days to get everything set up once the person receives a check from their old fund. Again, though, keep in mind that while this could be used as a loan, it won’t happen quickly. It could take months for your old retirement provider to process your request.

Your First Home

The IRS allows a withdraw of up to $10,000 for the purchase of your first home but is this a good idea? Do you give up the compounding earning power of $10,000 to purchase a house or do you attempt to save the $10,000 or find a different kind of loan?

There are very favorable loan terms available for first time home buyers. Before using retirement money for this purpose, exhaust every other option.

Qualified Education Expenses

The same holds true with education expenses. You can use your retirement funds for education expenses but is it a good idea? Do you lose the long time earning power of your retirement money to pay for education expenses instead of taking out a subsidized student loan where you will receive tax credit? Only after careful evaluation should a person use retirement funds for this purpose.


Once you reach 59-and-a-half, you can withdraw your money without penalty. You will pay taxes unless your retirement funds are in a Roth IRA in which case you have been paying taxes on the capital gains since the fund’s inception.

If you’re looking for a short term answer to your financial difficulties, accessing your retirement funds is probably not the answer. If any of the above exceptions apply to you, it often takes months to determine eligibility and process all paperwork.

The IRS has set up these rules to discourage accessing retirement funds and for good reason. Unless your reasons for withdrawing funds are due to emergency or extraordinary reasons, it’s rarely a wise financial move to borrow against your retirement finances.

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6 thoughts on “How to Withdraw Money Early From Your 401K or IRA Without Paying a Penalty”

  1. I have become totally disabled and cannot work again. I have a 401k and a IRA. I am sure I will have to pay taxes on those. I am 61 and should qualify to withdraw from either account. Will the amount I withdraw go for my total income for the year, causing me to pay taxes on my Social Security Disability?

  2. My husband passed away without any life insurance. Is his death considered a life changing event to where I won’t be penalized the 10%?

  3. my wages have been reduced $ 30,000 over the last 5-6 years.
    credit card debt is $ 37,000 – 40,000. have been in a credit consoling program for 2 yrs / not getting ahead very fast.
    mortgage is ok / not behind
    will be having some more additional expenses in the next couple of months / not sure how we are going to pay for them. ( 11,500.00 )
    credit is fair / medium. cannot get any type of loan to help.
    considering bankrupcy.
    can we draw on our ira to get out of this mess ??

    thank you,

    • You can take a loan against your IRA and even withdraw it. But you’ll have to pay taxes and penalties. Check your IRA administrator to get a final cost of withdrawal.

  4. A 401K plan is a type of retirement savings plan a person may use to prepare for his needs once he is ready to stop working. Everyone’s personal circumstances are different in every way, including financially. Your goals for your entire financial future (and your present goals) all play a role in what your particular goals are for your retirement savings, and what your plan should be for how to get there. For a person who needs money and cannot get it from another source, 401K early withdrawal may seem like a good idea. Often, people take early withdrawals to pay for things such as college education for their offspring or buying a new home.
    Best of Luck

  5. There isn’t much in the (506) account, but I’d like to find some information on withdrawal for “disability”. I’m told by the insurance company that my pension will disappear (not enough to live on) and I will have to repay ALL of the benefits that I’ve received, if I were to get any type or amount of income at all.

    I have no other income, because of this atrocious regulation. I’m ineligible for SSDI. I’m looking for viable work but I get screamed at “WE DON’T HIRE THE DISABLED”, so my financial gets worse everyday that I can’t find information. And it’s been four years of cold and hungry.


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