Terminal Illness Early Withdrawal Exception: Form 5329 and Taxes

If a physician has certified that you are terminally ill, you can withdraw from a 401(k), 403(b), or IRA without paying the 10% early withdrawal penalty that normally applies before age 59½. This is the terminal illness early withdrawal exception, added to Internal Revenue Code Section 72(t)(2)(L) by the SECURE 2.0 Act and effective for distributions made after December 29, 2022.¹² The withdrawal itself is still taxable as ordinary income; only the 10% additional tax goes away. There is no dollar cap on how much you can take.

Who Counts as Terminally Ill

The statute defines terminal illness by life expectancy. A licensed physician must certify in writing that you have an illness or physical condition reasonably expected to result in death within 84 months (seven years) of the certification date.¹ The certifier must be a doctor of medicine or osteopathy authorized to practice medicine and surgery.³

Unlike a hardship distribution, you don’t have to show you’ve exhausted other resources. You just need the certification, and you need to obtain it before or at the time of the distribution.

IRAs and Employer Plans Work Differently

This is the point most people miss. The exception removes the 10% penalty on a qualifying withdrawal; it does not, by itself, create a right to take money out of an employer-sponsored plan. A terminal diagnosis alone does not entitle you to a distribution from a 401(k) or 403(b). You must already be eligible under your plan’s existing rules, such as separation from service, reaching a specified age, or an in-service hardship provision.² The IRS has acknowledged this appears to have been a drafting gap; other SECURE 2.0 exceptions, such as emergency personal expense distributions, explicitly create new distributable events, and this one does not.

IRA owners have no such barrier. You can withdraw from a traditional IRA at any time for any reason, and the terminal illness exception simply zeroes out the 10% penalty that would otherwise apply if you are under 59½.

If you participate in an employer plan and can access some kind of in-service distribution, you can claim the terminal illness exception on your own tax return even if the plan administrator codes the payout as a standard early withdrawal.² The plan does not need to have formally adopted the provision for you to use the exception.

Getting the Physician Certification

The certification is a written statement from your physician that identifies you by full legal name and states that your illness or condition is reasonably expected to result in death within 84 months of the certification date.² The date on the certification matters, because it starts the 84-month clock and it must be on or before the date of the distribution.

You do not file the certification with the IRS. Keep it in your tax records in case the IRS ever questions the exception. If you go through an employer plan, the administrator may ask to see it before processing the distribution.

Requesting the Money

For an IRA, contact your custodian and request a distribution the same way you would for any other reason. IRA owners can withdraw at will, so you don’t need to explain the medical basis to the custodian; the penalty exception is handled at tax time.

For a 401(k) or 403(b), submit the plan’s withdrawal request through your employer’s HR portal or the plan administrator. If the plan has adopted the terminal illness provision, the administrator may code the 1099-R accordingly. If not, you’ll fix the coding yourself on your return. Either way, the plan or custodian will issue a Form 1099-R the following January reporting the gross distribution.⁴

Claiming the Exception on Form 5329

You claim the exception on IRS Form 5329. On Line 2, enter the amount that qualifies and write exception number 20 in the space provided. Exception 20 is the code for distributions to individuals certified by a physician as terminally ill under the 84-month standard.⁵

Filing Form 5329 with exception 20 overrides a 1099-R that treats the payout as an ordinary early withdrawal. You do not need the plan’s cooperation. You do need the physician certification on hand if the IRS asks.

The Distribution Is Still Taxable

The exception removes the 10% penalty. It does not make the withdrawal tax-free. The distribution is ordinary taxable income in the year you receive it, subject to federal income tax rates that run from 10% to 37% for 2026, plus any state income tax that applies where you live.⁶⁷

A large withdrawal can push you into a higher bracket for the year. If the amount you need is substantial and the timing is flexible, splitting it across two calendar years can hold down the overall tax hit. A tax professional can help you model this before you pull the trigger.

Roth Accounts

Roth IRA and Roth 401(k) distributions work differently because the contributions were already taxed. Your contributions come out tax-free at any time. Earnings are fully tax-free only if the account has been open at least five years and you have reached age 59½. If you’re under 59½ and withdraw earnings, the terminal illness exception removes the 10% penalty, but the earnings portion is still subject to ordinary income tax.

Withholding

Because the IRS does not treat terminal illness as a separate distribution type for reporting, ordinary withholding rules apply. Eligible rollover distributions from employer plans carry a mandatory 20% federal withholding unless you do a direct rollover. The default for IRA distributions is 10%, and you can elect a different amount or none. Withholding is a prepayment against your eventual tax bill, not a separate tax.

Recontributing If You Don’t Need the Money

If your situation changes or you end up not needing all the funds, you can put the money back. The recontribution window runs three years from the day after you received the distribution, and the IRS treats the repayment as a rollover, so it does not count against annual contribution limits.¹

If you already paid tax on the distribution, recover it by filing Form 1040-X (Amended U.S. Individual Income Tax Return) for the affected year, explaining in Part II that you recontributed a terminal illness distribution under IRC 72(t)(2)(L). File a separate 1040-X for each year you are amending. If you recontribute before filing the original return, simply leave the recontributed amount out of taxable income and skip the amendment. The deadline for a refund on an amended return is three years from the date you filed the original return, or two years from the date you paid the tax, whichever is later.⁸

1
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
2
Internal Revenue Service. Internal Revenue Bulletin 2024-2, Notice 2024-2
3
Social Security Administration. Social Security Act Title XVIII Section 1861
4
Internal Revenue Service. Instructions for Forms 1099-R and 5498
5
Internal Revenue Service. 2025 Instructions for Form 5329
6
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
7
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
8
Internal Revenue Service. Instructions for Form 1040-X, Rev. December 2025