A terminal illness 401(k) withdrawal lets you pull money from your retirement account before age 59½ without the usual 10% early withdrawal penalty, provided a physician has certified that your illness is reasonably expected to cause death within 84 months. The rule was added by the SECURE 2.0 Act and applies to distributions taken after December 29, 2022. One point matters more than any other: this is a tax rule, not a distribution rule. It removes the penalty from a withdrawal you already have the right to take. It does not, by itself, give you access to your account.
Who Qualifies Under the 84-Month Rule
The exemption covers anyone certified by a physician as having an illness or physical condition reasonably expected to result in death within 84 months of the certification date.1Internal Revenue Service. Notice 2024-02 – Guidance on Terminal Illness Distributions Seven years is broader than most people assume. It reaches beyond short-prognosis conditions to progressive illnesses where decline is expected to unfold over several years.
The certifying physician must be a doctor of medicine (MD) or doctor of osteopathy (DO) legally authorized to practice in the state where they provide your care.1Internal Revenue Service. Notice 2024-02 – Guidance on Terminal Illness Distributions A letter from a nurse practitioner will not satisfy the requirement, and neither will a diagnosis from any specialist who is not an MD or DO.
Timing is unforgiving. The certification must exist on or before the date of each distribution. Withdraw first, get the letter second, and that withdrawal does not qualify. You cannot fix it after the fact.1Internal Revenue Service. Notice 2024-02 – Guidance on Terminal Illness Distributions Get the physician’s certification in hand before you submit any distribution request.
Your Plan Still Has to Allow the Withdrawal
This is where people get stuck. The terminal illness exception waives the 10% penalty on money you take out. It does not override your plan’s own rules about when a distribution is permitted in the first place.
For active employees under 59½, a 401(k) or 403(b) typically allows distributions only through a limited set of channels: separation from service, a qualifying hardship, a plan loan, or a specific in-service event defined in the plan document. A terminal diagnosis does not automatically unlock your account. If the plan does not have a provision that fits your situation, the tax treatment never comes into play, because no distribution is available.
Read your summary plan description or call HR before doing anything else. Ask directly whether you are eligible for an in-service distribution or hardship withdrawal under your circumstances.
IRA owners avoid this problem. Traditional and Roth IRAs do not restrict distributions to specific events, so you can withdraw at any time and the terminal illness exception simply strips off the 10% penalty.2Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Which Accounts Are Covered
The penalty exemption applies to 401(k) plans, 403(b) plans, 403(a) annuity plans, other qualified plans under IRC Section 401(a), and both traditional and Roth IRAs.1Internal Revenue Service. Notice 2024-02 – Guidance on Terminal Illness Distributions
Governmental 457(b) deferred compensation plans are excluded. If your savings are split between a 401(k) and a 457(b), only the 401(k) side gets penalty-free treatment. There is no statutory dollar cap on the withdrawal itself. You can take out as much as your plan allows, up to your full vested balance, in a lump sum or across multiple distributions, as long as a valid certification is in place on or before each one.
You Still Owe Regular Income Tax
Waiving the 10% penalty does not make the money tax-free. A distribution from a traditional 401(k) or traditional IRA is ordinary income, taxed at your regular federal rate somewhere between 10% and 37%.3Internal Revenue Service. Federal Income Tax Rates and Brackets A large lump sum can push you into a higher bracket for the year. Splitting the withdrawal across two tax years is sometimes worth the delay.
Terminal illness distributions from a 401(k) are treated as eligible rollover distributions, so the plan must withhold 20% for federal income tax before paying you.4Internal Revenue Service. Safe Harbor Explanations – Eligible Rollover Distributions Request $100,000 and you receive $80,000; the other $20,000 goes to the IRS. You can recover any excess when you file, but the cash flow gap hurts if you need the full amount immediately. One workaround is a direct rollover into an IRA, which is not subject to the mandatory 20% withholding, followed by a withdrawal from the IRA at whatever amount you actually need.
Roth accounts behave differently. Your after-tax contributions come back tax-free. Earnings are only tax-free if the distribution is qualified, which generally requires both a five-year holding period and a triggering event such as reaching 59½ or disability. A terminal illness certification alone does not make a Roth distribution qualified, so earnings you withdraw early can still be taxable even though the 10% penalty is off the table.
How to Claim the Exemption on Your Tax Return
Your plan administrator will not code the distribution as penalty-exempt. Your Form 1099-R will arrive with distribution code 1, meaning “early distribution, no known exception.”5Internal Revenue Service. Instructions for Forms 1099-R and 5498 Claiming the exemption is on you.
File IRS Form 5329 with your return. On Line 2, enter the qualifying distribution amount and write exception number 20 in the space provided.6Internal Revenue Service. 2025 Instructions for Form 5329 Keep the physician’s certification with your tax records. You do not submit it with the return, but you need it if the IRS asks questions later.
You Have Three Years to Put the Money Back
If your prognosis improves or your finances change, you can recontribute any portion of a terminal illness distribution to a qualified retirement plan or an IRA within three years of the original withdrawal.2Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions The recontribution is treated as a tax-free rollover. If you already paid income tax on the distribution, you can file an amended return to recover it once you put the money back.
Not every plan accepts these repayments directly. If yours does not, you can still recontribute to an IRA, which follows the same framework used for qualified birth or adoption distributions.
How to Request the Distribution
Start with eligibility. Ask your HR department or plan recordkeeper whether your current situation makes you eligible for an in-service distribution or hardship withdrawal. IRA owners can skip this step.
Then gather what you need:
- A written physician certification from your MD or DO confirming the 84-month prognosis, dated on or before the day you submit the distribution request.
- The plan’s distribution form, available from HR, the recordkeeper, or the investment company that holds the account.
- Your plan name, participant ID, and the exact dollar amount you want to withdraw, verified against your vested balance.
Attach the certification to the distribution form. Many recordkeepers accept a secure electronic upload; if yours does not, send the package by certified mail to the address on the form. Processing usually takes one to three weeks. Keep copies of the certification, the distribution request, and any confirmation letters. You will need them at tax time and again if you decide to use the three-year repayment window. The withdrawal will appear on a Form 1099-R issued early the following year.5Internal Revenue Service. Instructions for Forms 1099-R and 5498