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Early Withdrawal Penalty Exemptions + Alternatives to Withdrawals

Updated: Nov 9, 2023

Taking an early withdrawal from your tax-deferred 401k or IRA is not a good idea. You get rocked with a 10% penalty and the amount you withdraw is no longer compounding in the market. However, when life hits you with a haymaker, an early withdrawal penalty isn’t your focus.

Writing a check

Luckily there are ways to minimize the damage to your retirement account. We are going to list exemptions that can at least protect you from having to pay the 10-percent penalty for early withdrawals. More crucially, we are going to list alternatives to removing your money from the investment account in the first place.

Options help protect your savings.

New Exemptions to Early Withdrawal Penalty

Congress took time in between their constant vacations to increase exemptions to withdrawal rules. Finally, good news for Americans this time around.


The Consolidated Appropriations Act of 2023 granted the following exemptions for ‘non-qualified’ retirement account withdrawals.

→Emergency withdrawals of $1,000 or less for “necessary personal or family emergency expenses.” Taxpayers can optionally repay the distribution within three years. Available in 2024.

→Domestic abuse victims may withdraw up to $10,000 penalty-free. Starts in 2024.

→Terminal illness or death. Requires a doctor’s certification that you’re expected to die within 84 months.

→Qualified disasters. Penalty-free withdrawals of up to $22,000 are available if your principal home is in a disaster area and suffered economic loss.

→Public safety officers at least 50 years old or have a minimum 25 years of service.

Before we get to early withdrawal penalties in place even before the 2023 Consolidated Appropriations Act, why not look at alternatives to removing money from IRAs early?

List of Alternative to Early Withdrawals

It’s easy to hand out financial advice to those whose shoes you have not been in. Yes, sound principles stand the test of time. But having empathy for others’ situations is important.

The following are suggestions that hopefully help some folks avoid depleting their retirement accounts. Then we will get to the other exemption options.

1. Borrow from family. Not what most people dream of doing over dinner. However, for many families, this is a better option than a 401k loan or early withdrawal.

2. Zero-percent credit card. Depends on availability, but at times these credit card offers are found weekly in mailboxes. Those who’ve struggled with overspending and debt should steer clear in most cases. But those with good credit scores and an organized mindset on paying bills could find this a better fit than taking money from their IRA.

3. Second mortgage. Again, this alternative to an early withdrawal depends on how the economy is doing. How tight are lenders with loans? How are interest rates? And how fast can you repay this loan? Historically home values rise consistently over time. So a small loan may not be as financially damaging as pulling money out of a retirement account. Keep in mind, risk plays a role since you’re borrowing on the property where you lay your head at night.

4. Side hustle, part-time job. These can be options unless you are facing the choice of an early withdrawal penalty due to health reasons. Many Americans have taken early IRA distributions due to illnesses that kept them from working their full-time job. But if you’re in a position to earn money needed in a pinch, a side hustle can produce decent to solid revenue depending on your skills. A part-time job will often be a slower infusion of cash unless it is a sales job.

5. Credit union. If you have a good relationship with your credit union, this is a great alternative to paying an early withdrawal penalty. Many people with excellent credit and a good history with their local or company credit union can still get signature loans.

*Not-a-Fun-Fact: The 10% penalty still applies for taking early distributions from a traditional IRA even if done to satisfy divorce court orders.

Financial meeting

It’s also wise to speak with a financial advisor or counselor before you pull the trigger on a retirement account distribution before you turn 59 and a half years old. Sometimes you don’t know what you don’t know. It helps to put your head together with a professional who has experience with issues you’re facing.

Exemptions to Early Withdrawal Penalty (already in effect)

These exemptions were in place before the latest legislative change of 2023. Again, you can save the 10% penalty in the following cases. Yet, taking money out of a retirement account pulls the rug out from under your future self. Because the money is no longer experiencing growth in the market.

First-time home purchasers can get up to a $10,000 penalty-free withdrawal.

Higher education expenses for you and immediate family.

● You have a disability that the IRS considers “total and permanent.”

Funeral expenses.

Medical bills. (Must amount to more than 7.5 percent of your adjusted gross income)

Birth or adoption costs. Up to $5,000. Repaying the withdrawal over three years is an option.

● Used to pay health insurance premiums (when unemployed for a minimum of 12 weeks).

● You’re a National Guard reservist or member who is called up for more than 180 days.

*Always check for updates on law changes that could impact your exemption status / options.

The Best Laid Plans

Before you get hit by life’s unexpected punches, please have plans in place. An emergency fund is a great place to start with any financial plan.

Also, setting short- and long-term goals helps set you up for success. Have a backup plan for a job loss, for example. Unemployment is not a plan, just a safety net that may not pay all your bills.

Plan for health issues and health coverage changes that could come from your or your partner’s coverage. Having a will in place as well as pre-paid funeral arrangements can keep your family members from having to make tough choices with their retirement accounts in the future.

financial planning

Most of all, don’t face difficult financial situations alone. Talk to a counselor, tax advisor, or financial planner. Sooner rather than later so you don’t have to make these tough decisions in a blink.

Investment advice offered through Private Advisor Group, LLC, a registered investment advisor.

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