IRA Terminal Illness Exception: Eligibility, Certification, and Taxes

If a doctor certifies that you have a condition reasonably expected to cause death within seven years, the IRA terminal illness exception lets you withdraw any amount from your IRA, 401(k), or similar retirement account before age 59½ without the usual 10% early withdrawal penalty. The exception was added by the SECURE 2.0 Act and codified at Internal Revenue Code Section 72(t)(2)(L), effective for distributions made after December 29, 2022.¹ The penalty goes away automatically once you have the right paperwork, but the money is still taxable, and you have to claim the waiver yourself on your return.

Who Qualifies

A physician must certify that you have an illness or physical condition reasonably expected to result in death within 84 months of the certification date.² Seven years is a much wider window than the six-month prognosis hospice uses, so people with serious but slower-moving conditions — certain cancers, ALS, advanced heart failure — can qualify long before hospice would be on the table.

Timing matters. The statute applies the exception to distributions made “on or after the date” of certification, so the letter has to be in hand before the money leaves your account.¹ Withdrawing first and getting certified later leaves a gap the IRS will not close. One certification does cover every distribution you take afterward within the certified timeframe; you don’t need a new letter for each withdrawal.

What the Physician Certification Must Contain

In Notice 2024-02, the IRS listed five things the certification must include. A short letter saying you are “terminally ill” is not enough.² The letter needs a clear statement that the illness or condition can reasonably be expected to result in death within 84 months of the certification date, a narrative description of the medical evidence supporting that prognosis, the name and contact information of the certifying physician, the date the physician examined you or reviewed your records along with the signing date, and the physician’s signature with an attestation that the narrative is based on their own examination or review.

You do not have to attach the underlying medical records, but keep them with the certification in your tax file. If the IRS questions the deduction, the certification is your primary evidence. Hold onto it for at least three years after you file the return that reports the distribution.

Which Accounts the Exception Covers

The exception applies broadly to retirement accounts otherwise subject to the 10% early withdrawal penalty: Traditional IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs, and employer plans including 401(k)s, 403(b)s, 403(a) annuity plans, and defined benefit plans.³

Your 401(k) plan does not have to offer a “terminal illness distribution” as its own withdrawal category. The IRS clarified in Notice 2024-02 that terminal illness is not a new distribution type, and plan sponsors have no special administrative or reporting obligations for these withdrawals.² If your employer’s plan will not process a distribution labeled that way, take whatever distribution the plan does allow — a hardship withdrawal, an in-service distribution, or a separation-from-service payout — and claim the penalty exception yourself when you file. What the plan calls the withdrawal doesn’t matter, provided you have the physician’s certification and the timing works.

No Dollar Cap, and Three Years to Put It Back

Congress set no ceiling on the amount you can withdraw under this exception. You can drain the whole account if that is what your situation requires.² Many other early withdrawal exceptions cap the amount; this one does not.

You also have three years from the distribution date to return some or all of the money to a qualified retirement account or IRA.¹ Amounts repaid inside that window are treated as a tax-free rollover. You can make partial repayments over time rather than returning the full sum at once. If you already paid income tax on the distribution, repaying it means you overpaid, and you file Form 1040-X to amend the earlier return and claim a refund on the returned portion.

The Distribution Is Still Taxable

The exception waives the 10% penalty. It does not waive income tax.⁴ A Traditional IRA, SEP, SIMPLE, or pre-tax 401(k) distribution is taxed as ordinary income in the year received. Federal rates for 2026 run from 10% to 37% depending on total taxable income.⁵ A large withdrawal can push you into a higher bracket, so a six-figure distribution often costs more in tax than people expect. Most states that tax retirement income will also take a share.

Roth IRAs behave differently. Contributions come out first, tax-free and penalty-free with or without any exception. The terminal illness exception matters for a Roth mainly when you are pulling earnings before age 59½ or before the account has been open five years; the earnings still face income tax, but the 10% penalty goes away.

Withholding and Estimated Tax

There are no special withholding rules for these distributions. Employer plan distributions that qualify as eligible rollover distributions carry a mandatory 20% federal withholding you cannot opt out of. IRA custodians default to 10% withholding, though you can elect a higher amount or none at all.

Because plan administrators run these withdrawals through their normal procedures, the amount withheld may not match your actual tax bill. A large IRA distribution with only 10% withheld can leave you badly short at year-end. The IRS generally waives the underpayment penalty if your withholding and estimated payments cover at least 90% of the current year’s tax or 100% of the prior year’s tax.⁶ If a distribution puts you well past those thresholds, make an estimated payment shortly after the withdrawal rather than counting on a discretionary waiver later.

How to Claim the Exception on Your Return

Your custodian will report the distribution on Form 1099-R using Code 1 in box 7, which the IRS reads as an early distribution with no known exception.⁷ There is no dedicated 1099-R code for terminal illness. The IRS put the responsibility on the taxpayer, not the plan.

To claim the waiver, file Form 5329 with your federal return. Enter the qualifying distribution amount on line 2 and use exception number 20 for distributions due to terminal illness.⁸ That is what tells the IRS to remove the 10% tax. Without Form 5329, the automated processing sees Code 1 on your 1099-R and assesses the penalty.

If you repay part of the distribution within the three-year window, the receiving institution reports the repayment on a later 1099-R, and you amend the original return to recover the tax on the repaid amount.⁷

What This Does Not Protect

Social Security retirement and disability benefits are not reduced by retirement account withdrawals. Social Security does not count IRA distributions, pension income, or investment earnings against your monthly payment.⁹

Means-tested programs are different. Medicaid and Supplemental Security Income (SSI) have strict income and asset limits. A lump-sum distribution counts as income in the month you receive it and becomes a countable asset if any of it is sitting in your bank account the following month. For someone relying on Medicaid to cover long-term care, a single large withdrawal can push assets past the eligibility threshold and end coverage. If you depend on these programs, talk to a benefits planner or elder law attorney before you withdraw. Penalty-free access to your retirement savings will not help if it costs you your Medicaid.

Mistakes That Undo the Exception

Taking the distribution before the physician signs the certification. The order is fixed by statute, and reversing it disqualifies the withdrawal.
Accepting a letter that omits the 84-month language. A physician’s note calling you “terminally ill” without the expected-death-within-84-months standard does not satisfy the IRS. Give your doctor the five required elements up front.
Skipping Form 5329. Your 1099-R will show Code 1, and the penalty is assessed automatically unless Form 5329 with exception number 20 is on your return.
Treating penalty-free as tax-free. Ordinary income tax still applies to Traditional IRA and pre-tax 401(k) distributions. Budget for the tax or adjust withholding before you pull the money.
Missing the three-year repayment deadline. Once that window closes, the tax you paid on the distribution is permanent.

1
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
2
Internal Revenue Service. Notice 2024-02
3
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
4
Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions from Traditional and Roth IRAs
5
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
6
Internal Revenue Service. Topic No. 306, Penalty for Underpayment of Estimated Tax
7
Internal Revenue Service. Instructions for Forms 1099-R and 5498
8
Internal Revenue Service. Instructions for Form 5329
9
Social Security Administration. Will Withdrawals from My Individual Retirement Account Affect My Social Security Benefits?