401(k) Early Withdrawal Penalty Exceptions for 2026
Every 2026 exception to the 10% 401(k) early withdrawal penalty, including the new long-term care rule, the Rule of 55, 72(t) SEPP, and how to claim each.
Quick Answer: When the 10% Penalty Doesn’t Apply
Pull money out of a 401(k) before age 59½ and the IRS adds a 10% additional tax on top of regular income tax, under IRC section 72(t). It gets reported on Schedule 2 of Form 1040 and, in many cases, on Form 5329.
About two dozen exceptions can erase that penalty, and 2026 adds a new one: qualified long-term care distributions of up to $2,600. What trips almost everyone up is what an exception does not do. It waives the 10% and nothing else. Penalty-free is not tax-free. The distribution is still ordinary income, it still stacks on top of your wages, and it can still push you into a higher bracket.
Key Takeaways
- New for 2026: SECURE 2.0 section 334 created a penalty exception for long-term care insurance premiums, capped at $2,600 for 2026. Your plan has to have adopted it first.
- Exceptions are not interchangeable. The Rule of 55 works only for employer plans; first-time homebuyer and higher education work only for IRAs. Moving money between the two is a one-way door in both directions.
- A hardship withdrawal is not a penalty exception. It unlocks access under your plan’s rules, and the 10% still applies unless the facts separately qualify.
- Employer plans withhold 20% up front on eligible rollover distributions. The 10% penalty is not part of that, so you pay it at filing time.
- Some states pile on. California adds its own 2.5% additional tax on Form FTB 3805P and does not conform to every federal exception.
- Break a 72(t) SEPP schedule and every penalty you avoided comes back retroactively, with interest.
New for 2026: Penalty-Free Withdrawals for Long-Term Care Premiums
This is the first tax year the exception exists. SECURE 2.0 section 334 added IRC section 72(t)(2)(N), which applies to distributions made after December 29, 2025. The IRS issued implementation guidance in Notice 2026-33 in May 2026.
The scope is narrow. This is a defined contribution plan feature only: a 401(k), 403(b), 457(b), or profit-sharing plan can offer it, and an IRA cannot. Notice 2026-33 is explicit that an individual retirement account under section 408(a) or annuity under section 408(b) is not a plan eligible to make qualified long-term care distributions.
How much you can take
A qualified long-term care distribution is capped at the lowest of three numbers:
- The long-term care insurance premiums you actually paid for the year
- 10% of your vested account balance
- $2,600 for 2026 (this figure is indexed for inflation)
You will see “$2,500” quoted in a lot of places online. That number is wrong for 2026. The correct cap is $2,600 per IRS Notice 2026-33.
The catch
This exception is optional for plan sponsors. Your employer’s plan has to have adopted the feature, and you have to file a long-term care premium statement with the plan. You cannot take an ordinary distribution and then decide at filing time to label it a qualified long-term care distribution on your own return. Notice 2026-33 is explicit about that.
The action item here is not a tax form. It’s a question for HR: has our plan adopted the section 334 long-term care distribution feature? Plan amendment deadlines run to December 31, 2027 for most plans, December 31, 2028 for collectively bargained plans, and December 31, 2029 for governmental plans, so adoption will be uneven for a few years.
No mandatory withholding
Qualified long-term care distributions are not treated as eligible rollover distributions. That means no 20% mandatory federal withholding and no section 402(f) rollover notice. You get the full amount, and you settle the income tax on it when you file.
The Full 2026 Exception Table: 401(k) vs. IRA
Most articles dump every exception into one flat list, which is the single biggest source of confusion here: several of the most-wanted exceptions work for only one account type. So here it is, split by account.
| Exception | Employer plan (401k, 403b) | IRA | Dollar limit | Code section |
|---|---|---|---|---|
| Age 59½ or older | Yes | Yes | None | 72(t)(2)(A)(i) |
| Death of the account owner | Yes | Yes | None | 72(t)(2)(A)(ii) |
| Total and permanent disability | Yes | Yes | None | 72(t)(2)(A)(iii) |
| Substantially equal periodic payments (SEPP) | Yes, after separation | Yes | Formula-based | 72(t)(2)(A)(iv) |
| Rule of 55 (separation from service at 55+) | Yes | No | None | 72(t)(2)(A)(v) |
| Qualified public safety employees (age 50 or 25 years of service) | Yes | No | None | 72(t)(10) |
| Unreimbursed medical expenses above 7.5% of AGI | Yes | Yes | Amount over the floor | 72(t)(2)(B) |
| QDRO payment to an alternate payee | Yes | No | None | 72(t)(2)(C) |
| IRS levy on the account | Yes | Yes | Levied amount | 72(t)(2)(A)(vii) |
| Qualified military reservist call-up | Yes | Yes | None | 72(t)(2)(G) |
| Birth or adoption of a child | Yes | Yes | $5,000 per child | 72(t)(2)(H) |
| Emergency personal expense | Yes | Yes | $1,000 per year | 72(t)(2)(I) |
| Terminal illness | Yes | Yes | None | 72(t)(2)(L) |
| Federally declared disaster | Yes | Yes | $22,000 | 72(t)(2)(M) |
| Domestic abuse victim | Yes | Yes | $10,500 for 2026 or 50% of vested benefit, whichever is less | 72(t)(2)(K) |
| Qualified long-term care (new for 2026) | Yes, if the plan adopted it | No | $2,600 for 2026 | 72(t)(2)(N) |
| ESOP dividends | Yes | No | None | 72(t)(2)(A)(vi) |
| Corrective distributions of excess contributions | Yes | Limited | Excess plus earnings | Various |
| First-time homebuyer | No | Yes | $10,000 lifetime | 72(t)(2)(F) |
| Qualified higher education expenses | No | Yes | Qualified expenses | 72(t)(2)(E) |
| Health insurance while unemployed | No | Yes | Premiums paid | 72(t)(2)(D) |
The rollover trap
Look at the bolded rows. They point in opposite directions, and that creates a decision most people never realize they’re making.
Roll your 401(k) into an IRA and you permanently lose the Rule of 55 for that money. There is no way to undo it. If you separated from service at 56 and were planning to live off that balance until 59½, a “let’s consolidate everything” rollover just cost you the 10% on every dollar you take out. The rollover also gives up QDRO treatment, ESOP dividends, and the new long-term care exception, all of which are employer-plan-only.
Leave the money in the 401(k) and you never get the IRA-only exceptions. No $10,000 first-time homebuyer withdrawal. No penalty-free tuition. No penalty-free health insurance premiums while you’re out of work.
Neither answer is right for everyone. But decide it on purpose, before the paperwork goes in.
The Four Exceptions People Actually Use
1. The Rule of 55
If you separate from service (quit, get laid off, or retire) in or after the calendar year you turn 55, distributions from that employer’s plan are penalty-free. You don’t have to be 55 on the day you leave, just at some point that year.
For qualified public safety employees (police, firefighters, EMS, corrections, certain federal roles), the threshold is age 50 or 25 years of service under the plan, whichever comes first.
Two limits matter. First, it applies only to the plan of the employer you just left. Old 401(k)s from previous jobs are not covered, and neither are IRAs. Second, your plan has to allow partial or installment distributions. Some plans only offer a lump sum, which technically qualifies but hands you a very large taxable event in one year.
2. 72(t) substantially equal periodic payments
SEPP works at any age, which is why the early-retirement crowd builds plans around it. You commit to a fixed schedule of withdrawals calculated under one of three IRS methods (required minimum distribution, fixed amortization, or fixed annuitization).
The commitment is the hard part. Payments must continue for the longer of five years or until you reach 59½. Start at 50 and you’re locked in for nearly a decade. Start at 57 and you’re locked in until 62.
Notice 2022-6 lets you use an interest rate of up to the greater of 5% or 120% of the federal mid-term rate for SEPPs beginning on or after January 1, 2023. The 5% piece is a floor, not a ceiling, and it applies even when market rates are far lower. That change roughly doubled the annual payment a given balance can support compared with the old rate rules, which is why SEPP became viable again for smaller accounts.
Break the schedule (take extra, take less, or roll the account) and the IRS applies recapture: every 10% penalty you avoided comes back retroactively, plus interest. The one change you’re allowed is a single one-way switch from the fixed amortization or fixed annuitization method to the RMD method. Talk to a tax professional before you start a SEPP, not after.
3. Unreimbursed medical expenses
You can withdraw penalty-free up to the amount of unreimbursed medical expenses that exceed 7.5% of your AGI for the year. You do not have to itemize to use this one, which surprises people. The 7.5% floor is the same one used for the medical expense deduction, but the two are separate calculations.
There’s a circularity to watch. The withdrawal itself raises your AGI, which raises the 7.5% floor, which shrinks the exempt amount. Take out $25,000 to pay medical bills and the floor moves before you get to apply it.
4. The SECURE 2.0 small-dollar exceptions
These are newer, smaller, and easier to claim than most people expect:
- Emergency personal expense: $1,000 per calendar year. You self-certify the need, no documentation required. You can repay it within three years, and until you do (or until three years pass), you can’t take another one.
- Domestic abuse victim: the lesser of $10,500 for 2026 or 50% of your vested benefit. Self-certified, and repayable within three years. Most articles still quote the old $10,000 figure; the 2026 indexed amount is $10,500 per IRS Notice 2025-67.
- Federally declared disaster: up to $22,000, with the income spreadable over three years and repayable within three years.
- Birth or adoption: $5,000 per child, per parent. Both spouses can each take $5,000 for the same child.
- Terminal illness: no dollar cap, but it requires physician certification that the condition is reasonably expected to result in death within 84 months.
Hardship Withdrawal Is Not a Penalty Exception
This is the most expensive misunderstanding on the topic, and it is everywhere.
A hardship withdrawal is a plan-level rule. It answers the question “will my employer’s plan let me touch this money while I still work here?” The standard is an immediate and heavy financial need. That’s it. It has nothing to do with IRC section 72(t).
A hardship withdrawal is penalty-free only if the underlying facts independently match a real exception. Medical bills above 7.5% of AGI come out penalty-free because of the medical exception, not because of the hardship label. Money pulled to stop an eviction or a foreclosure is fully penalized. So is tuition for a child, at least from a 401(k), because that exception is IRA-only.
Vanguard’s How America Saves 2026 reports that 6% of participants took a hardship withdrawal in 2025, up from 5% in 2024 and roughly triple the pre-pandemic rate. The median withdrawal was about $1,900, and roughly a third were taken to prevent foreclosure or eviction. That last group is paying the full 10% on top of income tax at the worst possible moment.
Compare that to a 401(k) loan, which is not a distribution at all. No income tax, no penalty, as long as you repay on schedule. If you leave the job with an outstanding balance, the unpaid amount becomes a deemed distribution, and then the penalty question comes back.
What It Actually Costs: A 2026 Worked Example
Take a single filer with $70,000 in wages who withdraws $25,000 from a 401(k) at age 45 with no exception available.
Step 1: what lands in your bank account
The plan must withhold 20% federal tax on eligible rollover distributions. So $25,000 gross becomes $20,000 in hand. The 10% penalty is not withheld. That’s a separate bill at filing.
Step 2: the income tax
Using the 2026 federal brackets and the $16,100 single standard deduction:
- Without the withdrawal: $70,000 minus $16,100 = $53,900 taxable. Federal tax = $6,570
- With the withdrawal: $95,000 minus $16,100 = $78,900 taxable. Federal tax = $12,070
The withdrawal added $5,500 in income tax. That’s a clean 22% because the whole $25,000 landed inside the 22% bracket, which runs from $50,401 to $105,700 for single filers in 2026.
Step 3: the penalty
10% of $25,000 = $2,500, reported on Schedule 2.
Step 4: the total
| Line item | Amount |
|---|---|
| Gross withdrawal | $25,000 |
| 20% mandatory federal withholding | -$5,000 |
| Cash received | $20,000 |
| Federal income tax on the withdrawal | $5,500 |
| 10% additional tax (penalty) | $2,500 |
| Total federal cost | $8,000 |
| Still owed at filing (after withholding) | $3,000 |
| Net after all federal tax | $17,000 (68%) |
Live in California and add another 2.5% state additional tax on Form FTB 3805P ($625 here), plus California income tax. California also does not conform to every federal exception, so clearing the federal test does not automatically clear you at the state level.
Run your own numbers with the 401(k) Early Withdrawal Penalty Calculator, then check where the withdrawal lands with the Tax Bracket Calculator and the Effective Tax Rate Calculator.
Standalone calculators answer one question at a time, though, and an early distribution touches everything. If you want to see it in context, Tax47 lets you build the whole return, drop in the 1099-R alongside your W-2, and watch the estimated refund move as the withdrawal stacks on your other income, shifts credit phase-outs, and eats into the withholding you’ve already paid. It runs on your device with no account, which matters when you’re entering numbers from a rough year.
How to Claim an Exception on Your 2026 Return
Everything starts with box 7 on Form 1099-R:
- Code 1: early distribution, no known exception. The plan is telling the IRS to expect the 10%.
- Code 2: early distribution, exception applies. The plan already handled it, and you generally don’t need Form 5329.
- Code 3: disability. Code 4: death. Code 7: normal distribution.
If your form shows code 1 but you qualify for an exception, file Form 5329 and enter the matching exception code in Part I. Commonly used codes include 01 (separation from service at 55 or older), 02 (SEPP), 03 (disability), 05 (medical expenses over the 7.5% AGI floor), 06 (QDRO), 08 (higher education, IRA), and 09 (first-time homebuyer, IRA). Check the current Form 5329 instructions, since the code list changes as new exceptions are added.
The additional tax flows from Form 5329 to Schedule 2 (Form 1040) and then onto your 1040.
Plan for this: the plan administrator often cannot know an exception applies. Your medical expenses, your SEPP schedule, your first home, your unemployment health premiums, none of that is visible to them. Expect a code 1 in those cases, and expect to claim the exception yourself.
One more thing, about putting the money back: you generally cannot. Once a distribution is taken (outside the repayable SECURE 2.0 categories and the 60-day rollover window), it’s gone. Rebuilding it runs into the 2026 contribution limits of $24,500 in elective deferrals, plus $8,000 catch-up at 50 or older, or $11,250 for ages 60 to 63. If you earned more than $150,000, your catch-up contributions must now be made on a Roth basis.
Related Reading
- 2026 Federal Tax Brackets: the bracket table the worked example uses
- Required Minimum Distributions in 2026: the other end of the retirement distribution timeline
- Roth vs. Traditional IRA Tax Impact: which bucket the money should have been in
- Medical Expense Deduction 2026: the 7.5% AGI floor in detail
- RMD Calculator and the full tools library
Sources & References
- IRS: Retirement topics, exceptions to tax on early distributions. The master exception chart showing which exceptions apply to plans versus IRAs.
- IRS Topic no. 558: Additional tax on early distributions. The 10% additional tax, the 59½ threshold, and reporting on Schedule 2.
- IRS Notice 2026-33: Qualified Long-Term Care Distributions. The $2,600 cap for 2026 and the plan-adoption requirement.
- IRS Notice 2025-67: 2026 Amounts Relating to Retirement Plans and IRAs. The $10,500 domestic abuse victim limit and 2026 contribution limits.
- IRS Notice 2024-55: Emergency personal expense and domestic abuse distributions. Self-certification and repayment mechanics.
- Vanguard: How America Saves 2026. The record 6% hardship withdrawal rate.
- Kitces: How Notice 2022-6 Can Help 72(t) Early Distribution Planning. The 5% SEPP interest rate rule.
- California FTB: Early distributions. The additional 2.5% state tax and Form FTB 3805P.
This article is for educational purposes only and is not tax, legal, or financial advice. The figures shown are estimates. Penalty exceptions depend on your plan’s terms and your specific facts: confirm eligibility with your plan administrator before taking a distribution, and consult a qualified tax professional before starting a 72(t) SEPP schedule. Tax rules change, so always check current IRS guidance.
Frequently Asked Questions
What are the exceptions to the 401(k) early withdrawal penalty in 2026?
There are roughly two dozen exceptions under IRC section 72(t), including the Rule of 55, death, total and permanent disability, 72(t) substantially equal periodic payments, unreimbursed medical expenses above 7.5% of AGI, QDRO payments, IRS levy, military reservist call-up, terminal illness, birth or adoption ($5,000 per child), federally declared disaster ($22,000), emergency personal expense ($1,000), domestic abuse ($10,500 for 2026), and, new for 2026, qualified long-term care distributions up to $2,600.
What is the new 2026 401(k) exception for long-term care insurance?
SECURE 2.0 section 334 added IRC section 72(t)(2)(N) for distributions made after December 29, 2025. You can withdraw the lesser of your actual long-term care premiums, 10% of your vested balance, or $2,600 for 2026 without the 10% penalty, but only if your plan has adopted the feature and a long-term care premium statement is on file.
Does a hardship withdrawal avoid the 10% penalty?
No. A hardship withdrawal is a plan rule that lets you access the money early; it is not a section 72(t) exception. It is penalty-free only if the underlying facts independently qualify, such as unreimbursed medical expenses above 7.5% of AGI.
How does the Rule of 55 work?
If you leave your job in or after the calendar year you turn 55, you can take penalty-free distributions from that employer's plan. The age is 50, or 25 years of service, for qualified public safety employees. It applies only to the plan you left, and it does not apply to IRAs.
Do I still pay income tax if an exception applies?
Yes. Every exception waives only the 10% additional tax. The distribution is still ordinary income on your return, and an employer plan generally withholds 20% federal tax on eligible rollover distributions.
Can I take money out of a 401(k) for a first home or college without the penalty?
Not from a 401(k). The first-time homebuyer ($10,000 lifetime) and qualified higher education exceptions are IRA-only. Rolling the money to an IRA first would unlock them, but it would permanently forfeit the Rule of 55 for that money.
How do I claim a penalty exception on my tax return?
Start with box 7 on Form 1099-R. Code 2 means the plan already applied an exception. If the form shows code 1 but an exception applies, file Form 5329 with the correct exception code; the additional tax flows to Schedule 2 of Form 1040.
What happens if I break a 72(t) SEPP schedule?
Modifying the payments before the longer of five years or age 59½ triggers recapture: every 10% penalty you avoided comes back retroactively, plus interest. The one permitted change is a one-time switch from the fixed amortization or annuitization method to the RMD method.