Taking a 401(k) withdrawal for medical expenses can avoid the 10% early withdrawal penalty, but only on the portion of unreimbursed medical costs that exceeds 7.5% of your adjusted gross income for the year.1Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions The rest of the distribution still gets the penalty, and the entire amount is taxable as ordinary income either way. Getting the number right means understanding the AGI math, what the IRS counts as a qualifying expense, and the forms that turn a Code 1 distribution into a penalty-free one.
How the 7.5% AGI Floor Works
The penalty exception under IRC Section 72(t)(2)(B) waives the 10% additional tax on the portion of your distribution that doesn’t exceed your unreimbursed medical expenses above 7.5% of AGI.2Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Everything below that floor is considered a normal cost of living for penalty purposes.
Put numbers on it. AGI of $80,000 puts your floor at $6,000. If you have $15,000 in unreimbursed medical bills, $9,000 sits above the floor. Withdraw $15,000 from your 401(k), and $9,000 escapes the 10% penalty while the remaining $6,000 gets hit with it. All $15,000 still counts as taxable income.
You don’t need to itemize to use this exception. The IRS applies the Section 213 calculation whether you take the standard deduction or not.3Office of the Law Revision Counsel. 26 USC 213 – Medical, Dental, Etc., Expenses But the calculation happens on your return, not at the plan level. Your administrator won’t compute it and won’t cap your distribution at the penalty-free amount. That’s on you.
What Counts as a Qualifying Medical Expense
The exception uses the Section 213 definition of medical care: amounts paid for diagnosing, treating, or preventing disease, or for care that affects any structure or function of the body.3Office of the Law Revision Counsel. 26 USC 213 – Medical, Dental, Etc., Expenses Doctor and hospital bills, dental and vision care, prescription drugs, mental health treatment, physical therapy, and long-term care services all qualify. Health insurance premiums, including Medicare Part B, are covered too.
Some less obvious costs also count. Transportation to medical appointments qualifies at the IRS medical mileage rate of 20.5 cents per mile for 2026, plus parking and tolls.4Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents Per Mile Lodging for out-of-town treatment is deductible up to $50 per person per night, or $100 if a parent is traveling with a sick child. Meals never count.5Internal Revenue Service. Publication 502 (2025), Medical and Dental Expenses
What doesn’t count: cosmetic procedures that aren’t medically necessary, non-prescription supplements taken for general wellness, gym memberships, and anything already reimbursed by insurance or another source. That last piece trips people up. If your insurer paid part of a hospital bill, only your out-of-pocket portion counts toward the exception.
Same Year, Same Family
Two limits matter. First, the medical expenses have to be paid in the same tax year as the distribution. Surgery paid in December 2025 followed by a January 2026 withdrawal won’t work; the 2026 exception looks only at 2026 expenses. Second, the expenses can be yours, your spouse’s, or a dependent’s, because Section 213 covers all three.3Office of the Law Revision Counsel. 26 USC 213 – Medical, Dental, Etc., Expenses Keep documentation showing the relationship and that the bill wasn’t paid by the dependent’s own insurance.
A Hardship Withdrawal Is Not the Penalty Exception
This is where the most money is lost. A hardship withdrawal and the medical penalty exception are two separate rules.
A hardship withdrawal is a plan-level provision. Your 401(k) may release funds when you have an “immediate and heavy financial need,” and medical expenses for you, your spouse, or dependents are one of the recognized reasons.6Internal Revenue Service. Hardships, Early Withdrawals and Loans Qualifying for the hardship does not waive the 10% penalty. The hardship rules only control whether the plan lets the money out. The penalty exception is a separate federal tax rule you claim when you file.
Watch the 20% Withholding When You Request the Money
Plan administrators are required to withhold 20% of any taxable distribution for federal income tax before sending you the money.7Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules Request $10,000 and you’ll receive $8,000.
To net what you actually owe the provider, gross up the request. Divide your target by 0.80. A $10,000 bill means requesting $12,500, so 20% withholding of $2,500 leaves you with $10,000 in hand. Remember that the full $12,500 counts as taxable income, and only the portion above your 7.5% AGI floor escapes the penalty. Pulling more than you need has real tax consequences.
Most plans send funds within about 10 business days once the request is approved.8Fidelity. I Need My 401(k) Money Now: 401(k) Early Withdrawals
Claiming the Exception on Your Return
Your plan administrator will send Form 1099-R by January 31 of the following year.9Internal Revenue Service. General Instructions for Certain Information Returns (2025) Box 7 will show distribution Code 1, “early distribution, no known exception.”10Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498 That’s normal. The administrator uses Code 1 for medical distributions because they don’t know your AGI or whether you’ll qualify. You claim the exception on your return, not through the 1099-R.
File Form 5329 with your return, enter exception number 05, and calculate the portion of the distribution exempt from the 10% additional tax.11Internal Revenue Service. 2025 Instructions for Form 5329 The exception covers the distribution “up to the amount you paid for unreimbursed medical expenses during the year minus 7.5% of your adjusted gross income.” Anything above that penalty-free amount owes the 10%.
Keep receipts, invoices, explanations of benefits, and proof of payment for every dollar you’re claiming. If the IRS audits, you’ll need to show each expense qualified under Section 213 and wasn’t reimbursed.
The Income Tax Bill
Avoiding the penalty is not avoiding tax. A traditional 401(k) distribution is fully taxable as ordinary income because you never paid tax on the contributions or their growth.7Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules The withdrawal adds to your gross income for the year, and a large one can push you into a higher bracket.
Someone earning $70,000 in wages who takes a $20,000 distribution reports $90,000 in gross income. That can affect not just the federal rate but eligibility for income-based credits and deductions. If timing is flexible and each year’s expenses independently clear the 7.5% floor, splitting bills across two tax years can soften the bracket impact.
State tax adds another layer. Most states with income tax will tax the distribution as ordinary income, and not all conform to the federal penalty exception. Check your state’s treatment before you assume federal is the only cost.
Alternatives to Consider First
A withdrawal is permanent. The money leaves your retirement account and doesn’t come back. Two other paths often cost less.
Take a 401(k) Loan Instead
If your plan allows loans, you can borrow the lesser of $50,000 or 50% of your vested balance.12Internal Revenue Service. Retirement Plans FAQs Regarding Loans A loan isn’t a taxable event. You repay yourself with interest, usually over five years via payroll deduction, and skip both income tax and the 10% penalty entirely. The catch: if you leave your job before repaying, most plans require full repayment within a short window or treat the balance as a taxable distribution.
The SECURE 2.0 Emergency Distribution
Starting in 2024, the SECURE 2.0 Act allows plans that adopt it to offer a penalty-free emergency personal expense distribution of up to $1,000 per year for unforeseeable financial needs. Repay it within three years and you can take another. If you don’t repay, you have to wait until the repayment window closes or until new contributions equal the amount withdrawn. It’s small, but for a modest medical bill it avoids the penalty without needing to clear the 7.5% AGI floor. Not every plan has adopted it yet, so ask your administrator.