Exceptions to the Additional Tax on Early Distributions

Pulling money out of a 401(k) or IRA before age 59½ normally triggers a 10% additional tax on top of ordinary income tax, but there are more than a dozen exceptions to the 10% early withdrawal penalty. Some apply to every kind of retirement account. Some only work for IRAs. Others only work for employer-sponsored plans like 401(k)s and 403(b)s. The SECURE 2.0 Act, signed in December 2022, added several more that have been phasing in through 2026. Which category your situation falls into determines whether the exception is available at all, and claiming it usually means filing Form 5329 with your return.

Exceptions That Work for Any Retirement Account

The following exceptions apply whether your money sits in an IRA, a 401(k), a 403(b), or another qualified plan. The distribution still counts as taxable income unless it’s a qualifying Roth distribution, but the extra 10% goes away.

Death of the Account Owner

Distributions paid to a beneficiary or the account holder’s estate after the owner dies are automatically exempt. The payer typically codes the 1099-R correctly, so beneficiaries rarely need to file anything extra.¹

Total and Permanent Disability

If you’re unable to perform any substantial work because of a physical or mental condition expected to last indefinitely or result in death, your withdrawals escape the penalty. You need a physician’s determination documenting the condition, and the disability must exist before the distribution. Keep the documentation. The IRS won’t ask upfront but will expect it if the return is examined.²

Terminal Illness

SECURE 2.0 created a separate terminal illness exception for distributions made on or after December 29, 2022. A physician other than yourself (an MD or DO) must certify that your condition is reasonably expected to result in death within 84 months. The certification has to include a narrative description of the supporting evidence, the examining physician’s contact information, and the date of examination.¹

There’s no dollar cap. And if your condition improves, you can put the money back into an eligible plan within three years, and the distribution gets treated as though it never happened for tax purposes.

Substantially Equal Periodic Payments (72(t))

You can dodge the penalty at any age by setting up a schedule of substantially equal periodic payments, often called a 72(t) distribution or SEPP. Payments must be calculated using one of three IRS-approved methods: required minimum distribution, fixed amortization, or fixed annuitization.³ For the two fixed methods, the interest rate cannot exceed 120% of the federal mid-term rate from either of the two months before your first distribution.⁴

This is one of the most inflexible exceptions in the code. You must continue the schedule for at least five years or until you reach 59½, whichever comes later. Change the payment amount, skip a year, or take an extra withdrawal before that period ends and every prior distribution retroactively loses its exemption. You’d owe the 10% penalty on every dollar, plus interest, reported on Form 5329.³

Unreimbursed Medical Expenses

You can withdraw penalty-free for medical expenses, but only the portion that exceeds 7.5% of your adjusted gross income for the year. That’s the same floor used for the itemized medical deduction, and you don’t have to itemize to use it here.⁵ If your AGI is $80,000 and you have $10,000 in unreimbursed bills, 7.5% of AGI is $6,000, and only the $4,000 above that floor qualifies. The distribution has to happen in the same tax year you incur the expenses.⁶

IRS Levy

If the IRS levies your retirement account to collect unpaid taxes, the resulting distribution isn’t subject to the penalty. This only covers a formal levy. Voluntarily pulling money to pay a tax bill does not qualify.⁷

Birth or Adoption

Each parent can withdraw up to $5,000 penalty-free from a defined contribution plan or an IRA following the birth or legal adoption of a child. The withdrawal must occur within one year of the birth or adoption date, and you can later repay the amount to an eligible plan.⁷

Qualified Reservist Distributions

Reservists called to active duty for at least 180 days can take penalty-free distributions from their IRAs or employer plans during the active duty period. You can repay the amount to an eligible plan within two years after active duty ends.⁶

Exceptions Only for IRAs

These apply only to distributions from Individual Retirement Arrangements: traditional, Roth, SEP, and SIMPLE IRAs. If the same money sits in a 401(k) or 403(b), these rules don’t help.

Qualified Higher Education Expenses

IRA funds used for tuition, fees, books, supplies, and equipment at an eligible postsecondary institution avoid the penalty. Room and board also qualify if the student is enrolled at least half-time. The expenses can be for you, your spouse, your children, or your grandchildren.¹ The penalty-free amount is reduced by any tax-free educational assistance the student received, like scholarships or Pell grants. The distribution has to happen in the same tax year the expenses are paid.

First-Time Home Purchase

You can pull IRA funds for a first home, up to a $10,000 lifetime limit per person. Two qualifying spouses can each take $10,000 for a combined $20,000. “First-time” is more generous than it sounds: you qualify as long as you haven’t owned a principal residence during the two-year period before the purchase date.¹ The money must be used within 120 days for acquisition costs like the purchase price and closing costs. You can also use this exception to help a child, grandchild, or parent buy a qualifying first home. The $10,000 cap has not been adjusted since 1997.

Health Insurance Premiums While Unemployed

If you’ve received federal or state unemployment compensation for at least 12 consecutive weeks, you can withdraw IRA funds penalty-free to pay health insurance premiums for yourself, your spouse, and your dependents. The distribution must occur in the year you received unemployment benefits or the following year, and the exemption ends once you’ve been reemployed for 60 days. The penalty-free amount is capped at what you actually paid in premiums.¹

Exceptions Only for 401(k)s and Other Employer Plans

These apply to 401(k)s, 403(b)s, and similar employer plans, not to IRAs. The distinction matters enormously if you’re thinking about rolling your employer plan into an IRA before taking a distribution.

Separation from Service at Age 55 or Later

If you leave your job during or after the calendar year you turn 55, distributions from that employer’s plan escape the 10% penalty. The separation has to occur in the year you turn 55 or later, but the distribution can come afterward. Someone who quits at 54 in March but turns 55 in November of the same year qualifies, because the separation and the 55th birthday fall in the same calendar year.⁷

Here’s the trap. If you roll your 401(k) into an IRA before taking any distributions, you lose this exception entirely. IRA withdrawals before 59½ don’t get the age-55 benefit no matter where the money originally came from. If you’re between 55 and 59½ and might need to access the money, keep it in the employer plan until you’re sure you won’t need penalty-free access.⁶

Qualified Domestic Relations Order

When a court issues a QDRO in a divorce, the alternate payee (usually a former spouse) can receive distributions from the participant’s employer plan without the 10% penalty. The distribution is taxable to the person receiving it, not the plan participant. If the alternate payee rolls the funds into an IRA instead, subsequent IRA withdrawals before 59½ would face the normal early distribution rules and would not carry over the QDRO exception.⁷

Public Safety Employees

Qualified public safety employees get a lower age threshold. That category includes police officers, firefighters, emergency medical personnel, customs and border protection officers, air traffic controllers, and federal law enforcement and corrections officers. They can take penalty-free distributions from governmental plans after separating from service during or after the year they turn 50.¹

SECURE 2.0 expanded the rule further. Public safety employees with at least 25 years of service qualify regardless of age, using whichever milestone (age 50 or 25 years of service) comes first. The distribution must come from a governmental defined benefit or defined contribution plan, with private-sector firefighters specifically included.⁸

Corrective Distributions of Excess 401(k) Contributions

If more was contributed to your 401(k) than the annual deferral limit allows, the excess has to be returned. When those corrective distributions happen by April 15 of the year after the excess occurred, the returned amount isn’t subject to the 10% penalty. Miss that deadline and the penalty may apply.⁹

Newer Exceptions Under SECURE 2.0

SECURE 2.0 added several new penalty exceptions that have been phasing in over the last few years. Some apply to both IRAs and employer plans, and most include the ability to repay the distribution later, something the older exceptions generally don’t offer.

Federally Declared Disaster Distributions

If you live in an area hit by a presidentially declared major disaster and suffer an economic loss, you can withdraw up to $22,000 across all your retirement plans and IRAs without the 10% penalty. You have three years to repay some or all of the amount to an eligible plan, and repayment is treated as a rollover, reversing the income tax as well.¹⁰ Your principal residence must have been in the disaster area during the incident period. The $22,000 limit applies per disaster.

Domestic Abuse Victim Distributions

Effective for distributions made after December 31, 2023, victims of domestic abuse can withdraw the lesser of $10,000 (adjusted for inflation) or 50% of their vested account balance without penalty. Domestic abuse covers physical, psychological, sexual, emotional, or economic abuse by a spouse or domestic partner. You self-certify eligibility on the distribution request form, and the plan administrator isn’t required to investigate. The distribution must be taken within one year of the abuse incident, and you have three years to repay.¹¹

Emergency Personal Expense Distributions

SECURE 2.0 created a limited exception for unforeseeable or immediate financial needs. You can withdraw up to $1,000 from an employer plan without the 10% penalty, as long as your vested balance stays above $1,000 after the withdrawal. No documentation of the emergency is required. You can repay within three years. If you don’t repay, you have to wait three calendar years before taking another emergency distribution under this provision. If you do repay in full, you can take another the following calendar year.

Long-Term Care Insurance Premiums

Beginning in late 2025, participants can withdraw up to $2,500 per year (indexed for inflation) to pay premiums for qualifying long-term care insurance contracts, free of the 10% penalty. This has been one of the slower SECURE 2.0 changes to take effect, and plans may still be adopting it. The distribution remains subject to ordinary income tax even though the penalty is waived.

Pension-Linked Emergency Savings Accounts

SECURE 2.0 authorized employers to offer pension-linked emergency savings accounts (PLESAs) attached to their defined contribution plans. Employees who are not highly compensated can contribute up to a $2,500 balance and withdraw at least once per month with no penalty, no tax on the contributed amounts, and no requirement to prove an emergency exists.¹² The first four withdrawals per plan year can’t be charged any fees. PLESAs are entirely optional for employers, so availability depends on whether your company has adopted the feature.

Roth IRA Contributions Are a Different Rule

None of the exceptions above need to apply for you to pull out your own Roth IRA contributions. Because Roth contributions are made with after-tax dollars, you can withdraw the amount you’ve contributed (not the earnings) at any time, at any age, for any reason, with no income tax and no 10% penalty. The ordering rules treat contributions as coming out first, before any earnings. The penalty and the exceptions only come into play for Roth earnings withdrawn before 59½ and before the account has been open five years.

How to Claim an Exception on Your Return

The plan administrator or IRA custodian reports your distribution on Form 1099-R, and Box 7 contains a distribution code that signals the reason. If the code already reflects a recognized exception (Code 3 for disability, Code 4 for death, or Code 2 for a known SEPP, for example), the IRS generally won’t assess the penalty and you don’t need to do anything extra.¹³

The problem is when Box 7 shows Code 1: an early distribution with no known exception. That’s common, because the payer often doesn’t know why you took the money. You then need to file Form 5329 with your tax return to claim the exception. On Part I, you enter the distribution amount and the exception code that matches your situation:⁶

01 — Separation from service after age 55 (or 50 / 25 years of service for public safety)
02 — Substantially equal periodic payments
03 — Total and permanent disability
04 — Death
05 — Unreimbursed medical expenses over 7.5% of AGI
06 — QDRO distributions to an alternate payee
07 — Health insurance premiums while unemployed (IRA only)
08 — Qualified higher education expenses (IRA only)
09 — First-time home purchase, up to $10,000 (IRA only)
10 — IRS levy
11 — Qualified reservist distributions
12 — Distributions incorrectly coded as early on the 1099-R

You only owe the penalty on the portion of the distribution that doesn’t qualify. If you withdrew $15,000 and $10,000 qualifies, the 10% applies just to the remaining $5,000. Skipping Form 5329 when your 1099-R shows Code 1 virtually guarantees you’ll get an IRS notice billing you for the full penalty.⁶

What to Keep in Your Files

The IRS doesn’t ask for proof when you file. If your return is examined, though, you’ll need documentation that supports the exception. What you keep depends on which one you claimed:

Disability or terminal illness: a physician’s statement meeting the IRS requirements, including the diagnosis, the basis for the determination, and the physician’s signature and contact information
Medical expenses: bills, explanation of benefits statements, and proof of payment showing the amounts weren’t reimbursed by insurance
Higher education: tuition statements (Form 1098-T), receipts for books and supplies, and enrollment verification
First-time home purchase: the settlement statement or closing disclosure showing the acquisition date and cost, plus evidence you didn’t own a principal residence in the prior two years
Unemployment health premiums: proof of 12 consecutive weeks of unemployment compensation and receipts for premium payments
QDRO: a copy of the court order and the plan administrator’s determination that it qualifies
Domestic abuse: your self-certification form and any supporting records you choose to retain
Disaster distributions: evidence of your principal residence in the disaster area and the economic loss you sustained

Keep these records for at least three years from the date you file the return claiming the exception. If you file before the due date, the IRS treats it as filed on the due date for statute-of-limitations purposes, so three years from the April filing deadline is the practical minimum.¹⁴

1
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
2
Internal Revenue Service. Retirement Topics – Disability
3
Internal Revenue Service. Substantially Equal Periodic Payments
4
Internal Revenue Service. Notice 2022-6 – Determination of Substantially Equal Periodic Payments
5
Internal Revenue Service. Publication 502 – Medical and Dental Expenses
6
Internal Revenue Service. Instructions for Form 5329 – Additional Taxes on Qualified Plans and Other Tax-Favored Accounts
7
Internal Revenue Service. Topic No. 558, Additional Tax on Early Distributions from Retirement Plans Other Than IRAs
8
Thrift Savings Plan. SECURE Act 2.0, Section 329 – Modification of Eligible Age for Exemption From Early Withdrawal Penalty
9
Internal Revenue Service. 401(k) Plan Fix-It Guide – Elective Deferrals Exceeded IRC Section 402(g) Limit
10
Internal Revenue Service. Disaster Relief Frequent Asked Questions – Retirement Plans and IRAs Under the SECURE 2.0 Act of 2022
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Internal Revenue Service. Notice 2024-55 – Certain Exceptions to the 10 Percent Additional Tax Under Code Section 72(t)
12
U.S. Department of Labor. FAQs – Pension-Linked Emergency Savings Accounts
13
Internal Revenue Service. Instructions for Forms 1099-R and 5498
14
Internal Revenue Service. Topic No. 305, Recordkeeping