How to Withdraw 401(k) Early Due to Permanent Disability With No Penalty

The IRS expects you to take money from your 401(k) when you're in your 60s and 70s, not next week. If you start withdrawing 401(k) money before age 59 1/2, you add a 10 percent tax penalty to the regular income tax on your withdrawals. The IRS allows some exceptions, one of which is a permanent disability.

To qualify you for early withdrawals, your disability has to be serious. The list of physical and mental impairments that can meet the IRS standards includes severe brain damage, the loss of multiple limbs, inoperable cancer, complete loss of speech or complete and untreatable deafness. A temporary problem, such as losing the use of both legs for several months, doesn't cut it. The impairment must be either terminal, long-lasting or – if the doctors can't make a definite prediction – one for which there's no expected recovery for the foreseeable future.

Having a long-term disability, by itself, doesn't guarantee you can make withdrawals with no penalty. You have to prove to the IRS that your disability is severe enough that you can't engage in "substantial gainful activity" – the work you did before the impairment, or an equivalent job elsewhere. The simplest way to prove your case is to show the IRS that the Social Security Administration or a private insurer has accepted that you're permanently disabled and pays you benefits accordingly.

Talk to your doctors and get your condition documented. Then collect the documentation so you can present it to your 401(k) plan administrator and the IRS and prove you're entitled to the withdrawal. When you're ready, contact your plan administrator and start withdrawing the money. You still have to pay regular taxes on withdrawals; keeping your withdrawals at the minimum you need can help keep your tax burden as low as possible.

The IRS allows "hardship" withdrawals for disability and other reasons, but your employer's 401(k) plan doesn't have to permit them. If your plan permits them but the IRS rejects your disability claim, you may have other options for tapping your 401(k).

Add up your medical expenses. If they're more than 7.5 percent of your adjusted gross income, you can claim a penalty-free hardship withdrawal to pay for them. This applies only to the share that actually tops 7.5 percent: If your income is $50,000, for instance, you can only use your 401(k) for expenses higher than $3,750.