Pulling money from your 401(k) early can feel like breaking the rules. We’re often told never to touch that money before age 59½.  

But when life throws you financial curveballs, you may have little choice other than to dip into your plan a bit early.  

The IRS allows for early withdrawals if you qualify for specific hardship distributions. In these situations, you may be able to access your retirement savings without having to pay the standard 10% early withdrawal fee. 

In most cases, you will still have to pay income taxes on the money you withdraw, however.  

It is important to note that each 401(k) plan determines whether it will allow for hardship distributions. The IRS does not require plans to do so. Thus, it is important that you understand your plan’s rules before moving forward with such a distribution.  

Let’s explore some of the circumstances where you may be able to access your funds early and penalty-free 

Medical Debt 

A sudden and large medical bill can quickly overwhelm your finances. Penalty-free withdrawals are only allowed in cases where your unreimbursed medical expenses are greater than 7.5% of your adjusted gross income (AGI) for the year.  

In terms of eligibility, the withdrawn funds can be applied toward expenses for yourself, your spouse or your dependents.  

Death of a Loved One 

In some cases, you also might be able to withdraw money penalty-free from your own 401(k) to pay for a loved one’s funeral expenses. But other plans may require you to pay the 10% early withdrawal penalty.  

In addition, if you inherit a 401(k) from your deceased loved one, you may be able to access the money penalty-free before turning age 59½.   

For example, someone who inherits their spouse’s 401(k) can take a lump-sum distribution penalty-free, or roll the money into an inherited IRA and access the money penalty-free.  

Penalty-free options are also available to non-spouses who inherit a 401(k). For more information, talk to a tax professional.  

Major Life Milestones 

The IRS recognizes how expensive it can be to fund some major life milestones, such as purchasing a new home or enrolling in higher education.  

For these events, individuals may be allowed to withdraw money penalty-free from retirement savings. Once again, not all plans allow for such distributions. As the IRS itself states:  

“If a 401(k) plan provides for hardship distributions, it must provide the specific criteria used to make the determination of hardship. Thus, for example, a plan may provide that a distribution can be made only for medical or funeral expenses, but not for the purchase of a principal residence or for payment of tuition and education expenses.” 

So, do not simply assume that you can make the withdrawal until you clearly understand your plan’s rules.  

When Mother Nature Strikes  

The federal SECURE 2.0 Act introduced the qualified disaster recovery distribution. If you live in a federally declared disaster zone, you might be able to take out up to $22,000 from your retirement savings – such as a 401(k) or IRA – penalty-free.  

If a 401(k) plan allows it, funds can be paid back into a retirement account for up to three consecutive years following the withdrawal. If repaid, the money is essentially treated as a  rollover contribution.  

Consult Before Withdrawal 

Avoiding dipping into your retirement savings early is usually considered to be the best long-term strategy. However, there are times when an early withdrawal from a 401(k) plan can help you cover big expenses.  

IRS rules allow penalty-free withdrawals under several circumstances as long as your plan allows it. Whether you are facing medical debt, a natural disaster, or planning for a major life milestone, understanding these rules is critical.  

Before you make any early withdrawals, you should always talk to a tax expert and your 401(k) manager. Doing so can help you verify your eligibility and avoid a costly mistake. 

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