How to Alleivate Penalties On and Early Withdrwal from a 401k

Millions of Americans that save money in their IRAs or qualified plans have no intention of withdrawing that money until after they reach age 59 ½ .

Unfortunately, there are times when circumstances dictate that this is absolutely necessary. Any number of misfortunes, such as medical expenses from an uninsured calamity or long period of joblessness, can leave all other sources of available assets depleted and force an early withdrawal from a 401k.

Of course, your retirement assets are probably the last source of assets that you want to draw on in the event of a financial hardship, but at times you may have no choice. At this critical juncture, all you will be aiming for is to evade the 10% fine on the early 401k withdrawal. The IRS has come to the rescue of those who need an early withdrawal from 401k by giving some immunity to the account holder for penalties, although the customary and Roth IRAs vary in some respects.

Here are some of the immunities from penalty for the account holder:

Traditional IRA

Demise.
Suffering from an extensive and lifelong physical or mental incapacity
72 (t) provision (a series of equal lifetime payments)
IRS levy of the plan
Medical expense.
To bear the cost of higher education
First-time home buyer expenses up to $10,000
Payment of health insurance for the jobless

Roth IRA

For the Roth IRA, there are identical exemptions which are for the traditional IRA (up to $10,000 withdrawal for those who are buying their first home free from 10% tax provided the money has been in the Roth IRA for five tax years at least).

Qualified Plans

All of the exceptions that apply to traditional IRAs.
Separation from service from your employer at age 55 or later.
If you happen to have made allotment to your ex-wife /ex-husband due to Qualified Domestic Relations Order (QDRO).
Dividend distributions from employee stock ownership plans (ESOPs) .

The IRS has allowed these penalty exceptions normally assessed on an early withdrawal from a 401k plan, as both a means of relief and encouragement. People who are most entitled to benefit from this are those suffering from grave circumstances such as death, divorce, and the disability; also individuals trying their best to excel in the field of education or working on building their home can receive help by getting tax-free early IRA withdrawals. These exemptions, understandably, belong to niche categories, which allow people tax-free dealings, such as relocates between accounts or plans and investments.

If you are currently strapped for funds and would like to know if you are eligible to take a penalty-free distribution from your IRA or qualified plan, ask your tax professional.