How To Avoid 401(k) Early Withdrawal Penalty

How To Avoid 401(k) Early Withdrawal Penalty

Unfortunately, the early withdrawal penalty assessed by the IRS (i.e. 10%) is deducted immediately upon withdrawal of funds. This 'indirect tax' is unavoidable at this current time, save for the exceptions listed below. Even when penalty-free, it is generally subject to income tax - though this can be avoided with redemption in lawful money.

Rule of 55: If one leaves their job in the year they turn 55+, one can take penalty-free withdrawals from that employer's 401(k).
Hardship Withdrawal: Withdrawals for immediate and heavy financial needs, such as medical expenses, educational expenses, or to prevent eviction, may be allowed without penalty if approved by one's plan administrator.
Substantially Equal Periodic Payments (SEPP): Taking a series of equal payments based on one's life expectancy, but one must follow IRS rules.
401(k) Loan: One can borrow from their 401(k) without penalty, but it must be repaid with interest within (5) years.
Other Exceptions: Penalty-free withdrawals may be permitted for reasons such as qualified birth or adoption expenses, disability or terminal illness, federally declared disasters, domestic abuse, emergency personal expenses, certain medical expenses, military service, Qualified Domestic Relations Orders (QDROs), IRS levies, and first-time home purchases. 
Rolling 401(k) into IRA or Roth IRA: Unfortunately, one must wait (5) years before withdrawing converted funds to avoid the penalty.

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