9 Legit 401(k) Early Withdrawal Options (With No Penalties)

Retirement accounts are meant to be left alone until the owner reaches age 59 1/2 or later. While preparing to retire comfortably, you want that money to grow as long as possible. 

While it's still your money, taking it out of your account early can result in taxes and penalty fees.

There are a few exceptions, though. Here are some qualifying ways to make penalty-free withdrawals from your 401(k).

If you become permanently disabled before the age of distribution, 59 1/2, you can withdraw from your 401(k) account without paying the 10% penalty. 

However, you'll need to report the money you withdraw as income, and you'll be subject to paying income tax on that amount.

Medical expenses can be crippling. Approximately 14 million people have more than $1,000 in medical debt in the U.S. You can use your 401(k) funds to pay for unreimbursed medical expenses if they are more than 7.5% of your adjusted gross income.

If your adjusted gross income is $60,000, then 7.5% of that is $4,500. Medical expenses that exceed $4,500 will qualify for penalty-free withdrawals.

A newer penalty-free withdrawal option became law in June 2023. Parents can now withdraw $5,000 from their 401(k) account within the 12-month period following a birth or adoption.

It's also applicable for both parents, so each individual could withdraw $5,000 for each qualifying child. Note: This law does not apply to step-parents adopting step-children.

If you have the unfortunate experience of suffering economic loss from a federally declared disaster, you can take a penalty-free withdrawal from your retirement account up to $22,000.

People who take this distribution will be subject to paying taxes on the amount but will be allowed to spread the income across three years to ease the tax burden the withdrawal may cause.

The participant will also be allowed to repay the funds back into the 401(k) account over the three years.

Another more recent penalty-free condition is for domestic abuse victims. Certified victims can request a distribution of the lesser of $10,000 or 50% of the vested account balance.

Candidates will have up to one year after the date they experience domestic abuse to self-certify their status as a victim. The amount can also be repaid within three years if they desire to do so.

Another new provision for penalty-free withdrawals is an emergency personal expense of up to $1,000 or a vested balance over $1,000. For example, if you only have $1,600 vested, you can only withdraw $600 under this condition.

Participants are allowed one distribution per calendar year for personal or family emergency expenses. If that amount is repaid, you may take a new withdrawal once each calendar year. If it is not repaid, you may only withdraw once every three years.

Depending on their profession, public safety sector employees are often phased out before the retirement age of 59 1/2. 

This includes law enforcement officers, corrections officers, customs and border protection officers, federal firefighters, private-sector firefighters, and air traffic controllers.

These employees may be able to access their 401(k) accounts without penalty because their employment is tied to their age.

When an employee has a terminal illness diagnosis by a physician, they can withdraw from their 401(k) without penalty. The doctor must agree that the person's condition will result in death within 84 months or seven years.

There is no limit to the withdrawal amount or number of withdrawals that can be made per year. People can repay the amount within three years if their health changes or they desire to.

While not technically a withdrawal, you can avoid paying penalties and taxes by taking a loan from your 401(k). Each plan will be different, but most plans allow you to take up to 50% of your vested balance and repay it over five years. 

You will need to pay back interest as well, but the good news is you are paying that interest to yourself, not a bank or other creditor.

However, if your employment ends while you still have an outstanding loan, you may be required to repay the loan quickly. Otherwise, it will be reported as a withdrawal.

Remember that penalty-free doesn't equal tax-free. Because a 401(k) account is funded with pre-tax dollars, any withdrawal you make is untaxed money. However, you will need to pay taxes on those funds, even if they’re used for hardship expenses.

Starting to save for retirement as soon as you begin working is a great way to build wealth, even if you feel like you don’t have extra money to invest. 

If your employer matches your contributions, that’s like getting free money for your retirement. Don’t miss that opportunity.