Exceptions to the Additional Tax on Early Distributions

You can avoid the 10% additional tax on an early retirement withdrawal if your situation fits one of the exceptions Congress has written into the tax code. There are more than a dozen of them. Some apply to every type of retirement plan, some only to IRAs, and some only to 401(k)s, 403(b)s, and similar employer plans. The SECURE 2.0 Act, signed in December 2022, added several more that phased in between 2024 and late 2025. The exceptions to the 10% early withdrawal penalty waive only that extra tax; the distribution itself still counts as ordinary income unless it’s a qualifying Roth withdrawal.

Exceptions That Work for Any Retirement Account

These apply whether the money sits in an IRA, a 401(k), a 403(b), or another qualified plan.

Death of the Account Owner

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

Total and Permanent Disability

If you can’t perform substantial work because of a physical or mental condition expected to last indefinitely or result in death, the penalty doesn’t apply. You’ll want a physician’s determination in your files. The IRS won’t ask for it when you file, but will expect it if the return is examined.²

Terminal Illness

For distributions on or after December 29, 2022, SECURE 2.0 added a separate terminal illness exception. A physician (an MD or DO other than yourself) must certify that your condition is reasonably expected to result in death within 84 months. The certification needs a narrative of the supporting evidence, the physician’s contact information, and the date of examination.¹ There’s no dollar cap, and if your condition improves you can repay the distribution to an eligible plan within three years and have it treated as a rollover.

Substantially Equal Periodic Payments

Also called a 72(t) distribution or SEPP. You commit to a schedule of equal payments calculated under one of three IRS-approved methods (required minimum distribution, fixed amortization, or fixed annuitization) and the payments come out penalty-free.³

The catch is strict. You must continue the schedule for at least five years or until you reach 59½, whichever is later. Change the 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. Mistakes here are expensive.³

Unreimbursed Medical Expenses

You can pull out money penalty-free for medical bills, but only the portion above 7.5% of your adjusted gross income qualifies. You don’t need to itemize deductions to use this exception; it just borrows the same floor.⁴ Say your AGI is $80,000 and you have $10,000 in unreimbursed bills. The 7.5% threshold is $6,000, so $4,000 escapes the penalty. The distribution and the expenses have to fall in the same tax year.⁵

IRS Levy

If the IRS levies your retirement account for unpaid taxes, the forced distribution is exempt. Voluntarily pulling money out to pay a tax bill does not count. The IRS has to be the one taking the money.⁶

Birth or Adoption

You can withdraw up to $5,000 penalty-free within one year of the birth or legal adoption of a child. Each parent can take a separate $5,000 from their own accounts. The amount can be repaid to an eligible plan later.⁶

Qualified Reservist Distributions

Reservists called to active duty for at least 180 days can withdraw from an IRA or employer plan during the active duty period without the penalty. The amount can be repaid to an eligible plan within two years after active duty ends.⁵

Exceptions Only for IRAs

These apply only to traditional, Roth, SEP, and SIMPLE IRAs. If the same money is in a 401(k) or 403(b), these rules don’t help you.

Qualified Higher Education Expenses

IRA money used for tuition, fees, books, supplies, and required equipment at an eligible postsecondary institution comes out penalty-free. Room and board qualify if the student is enrolled at least half-time. The expenses can be for you, your spouse, your children, or your grandchildren. The qualifying amount is reduced by any tax-free educational assistance the student received, like scholarships or Pell grants, and the expenses and distribution must fall in the same tax year.¹

First-Time Home Purchase

You can withdraw up to $10,000 (lifetime) from an IRA toward a first home. Each spouse has their own $10,000 limit from their own IRA. “First-time” is generous: you qualify as long as you haven’t owned a principal residence during the two years before the purchase. The funds must be used within 120 days of distribution for acquisition costs. You can also use this to help a child, grandchild, or parent. The $10,000 cap has not changed since 1997.¹

Health Insurance Premiums While Unemployed

If you’ve received federal or state unemployment compensation for at least 12 consecutive weeks, you can use 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 or the following year. The exception ends 60 days after you’re reemployed. Self-employed people only qualify if they actually received unemployment benefits.¹

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

These apply to employer-sponsored plans and not to IRAs. The distinction matters a lot if you’re thinking about rolling your 401(k) into an IRA before pulling money out.

Leaving Your Job At Age 55 or Later

If you separate from service during or after the calendar year you turn 55, distributions from that employer’s plan escape the penalty. The separation has to happen in the year you turn 55 or later; the distribution itself can come afterward. Someone who quits in March at age 54 but turns 55 in November of the same year qualifies, because both events fall in the same calendar year.⁶

The exception covers only the plan at the employer you separated from. Money sitting in a former employer’s plan from an earlier job doesn’t qualify unless you rolled it into the current employer’s plan before separating.

Here’s the trap people fall into constantly. If you roll a 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 came from. If you’re between 55 and 59½ and might need to tap the funds, keep them in the employer plan until you’re certain you won’t.⁵

Qualified Domestic Relations Order

When a court issues a QDRO as part of 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. If the alternate payee rolls the money into an IRA instead of taking it directly, later IRA withdrawals before 59½ do not carry over the QDRO exception.⁶

Public Safety Employees

Qualified public safety employees, including police officers, firefighters, EMS personnel, customs and border protection officers, air traffic controllers, and federal law enforcement and corrections officers, can take penalty-free distributions from governmental plans after separating during or after the year they turn 50. SECURE 2.0 added an alternative: 25 years of service with the employer sponsoring the plan, whichever milestone (age 50 or 25 years) comes first. The distribution must come from a governmental plan, with the specific exception that private-sector firefighters are also covered.¹⁷

Corrective Distributions of Excess Contributions

If you contributed more to your 401(k) than the annual deferral limit allows, the excess must 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 April 15 deadline and the penalty can apply.⁸

Newer Exceptions Added by SECURE 2.0

Several of these include something older exceptions generally don’t: the option to repay the distribution within three years and reverse the tax hit as well.

Federally Declared Disaster Distributions

If your principal residence was in a presidentially declared disaster area during the incident period and you suffered an economic loss, you can withdraw up to $22,000 across all your retirement plans and IRAs without the penalty. The $22,000 cap is per disaster, so a separate qualifying disaster in a later year would allow another $22,000. You have three years to repay some or all of it; repayments are treated as rollovers.⁹

Domestic Abuse Victim Distributions

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

Emergency Personal Expense Distributions

You can take up to $1,000 from an employer plan for an unforeseeable or immediate financial need, as long as your vested balance stays above $1,000 after the withdrawal. No documentation of the emergency is required. You have three years to repay. If you don’t repay, you must wait three calendar years before taking another one. If you do repay in full, you can take another the following calendar year.

Long-Term Care Insurance Premiums

Beginning in late 2025, you 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. Plans may still be adopting this provision. Ordinary income tax still applies.

Pension-Linked Emergency Savings Accounts

SECURE 2.0 lets employers offer pension-linked emergency savings accounts (PLESAs) attached to defined contribution plans. Non–highly compensated employees 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 need to prove an emergency. The first four withdrawals per plan year carry no fees. PLESAs are entirely optional for employers. Amounts above $2,500 get redirected into the participant’s regular retirement account.¹¹

Roth IRA Contributions Sit Outside All of This

You can withdraw your own Roth IRA contributions (not earnings) at any time, at any age, for any reason, with no tax and no penalty. The ordering rules pull contributions out before earnings. The exceptions in this article only matter for Roth earnings taken out before 59½ (and before the account has been open five years). If you’ve contributed $30,000 and the account has grown to $45,000, the first $30,000 comes out freely. The exceptions matter for the remaining $15,000.

How to Claim an Exception on Your Tax Return

Your plan administrator or custodian reports the distribution on Form 1099-R. Box 7 contains a code describing the reason. If the code already shows a recognized exception (Code 3 for disability, Code 4 for death, or Code 2 for a known SEPP, for instance), the IRS generally won’t assess the penalty.¹²

The trouble shows up when the 1099-R has Code 1, meaning an early distribution with no known exception. That’s common because the payer often has no way to know why you took the money. To claim your exception, file Form 5329 with your return and enter the distribution amount with the right exception code in Part I:⁵

01 – Separation from service after age 55 (or age 50 or 25 years of service for public safety employees)
02 – Substantially equal periodic payments
03 – Total and permanent disability
04 – Death
05 – Unreimbursed medical expenses above 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 10% on the portion of the distribution that doesn’t qualify. If you withdrew $15,000 and $10,000 is covered by an exception, you calculate the penalty on the remaining $5,000. Skipping Form 5329 when your 1099-R shows Code 1 almost guarantees an IRS notice billing you for the full penalty.⁵

Documentation to Keep

The IRS doesn’t ask for proof at filing time, but if your return is examined you’ll need to produce it. What you need depends on which exception you claimed:

Disability or terminal illness: a physician’s statement with 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 amounts weren’t reimbursed.
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, plus evidence you didn’t own a principal residence in the prior two years.
Unemployment and 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 keep.
Disaster distributions: evidence your principal residence was in the disaster area and documentation of the economic loss.

Keep these records for at least three years from the date you file the return claiming the exception.¹³

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. Publication 502 – Medical and Dental Expenses
5
Internal Revenue Service. Instructions for Form 5329 – Additional Taxes on Qualified Plans and Other Tax-Favored Accounts
6
Internal Revenue Service. Topic No. 558, Additional Tax on Early Distributions from Retirement Plans Other Than IRAs
7
Thrift Savings Plan. SECURE Act 2.0, Section 329 – Modification of Eligible Age for Exemption From Early Withdrawal Penalty
8
Internal Revenue Service. 401(k) Plan Fix-It Guide – Elective Deferrals Exceeded IRC Section 402(g) Limit
9
Internal Revenue Service. Disaster Relief Frequent Asked Questions – Retirement Plans and IRAs Under the SECURE 2.0 Act of 2022
10
Internal Revenue Service. Notice 2024-55 – Certain Exceptions to the 10 Percent Additional Tax Under Code Section 72(t)
11
U.S. Department of Labor. FAQs – Pension-Linked Emergency Savings Accounts
12
Internal Revenue Service. Instructions for Forms 1099-R and 5498
13
Internal Revenue Service. Topic No. 305, Recordkeeping