Using 401(K) Withdrawals for Medical Surgery

If you have a medical emergency for which you need to undergo surgery, you may have to turn to your 401k plan for funding, despite the income taxes and potential early withdrawal penalties. If the taxes and penalties worry you, consider taking a 401k plan loan instead, if your 401k plan allows them.

In order to take a hardship distribution from your 401k plan for medical surgery, your 401k plan must allow hardship distributions. Even though the IRS permits them, the IRS also makes it clear that it is up to each 401k plan to decide for itself whether to grant hardship distributions. If the plan does permit hardship distributions, the IRS considers medical expenses for you, your spouse and your depends as qualifying as long as the need is immediate and heavy.

To qualify for the early withdrawal penalty waiver, the surgery must be to treat an illness. The IRS does not permit you to include cosmetic surgery, defined as procedures designed to improve your appearance rather than treating a particular condition unless it is improves a deformity resulting from a congenital abnormality, a personal injury resulting from an accident or trauma, or a disfiguring disease. For example, you could include the cost of breast reconstruction after having a breast removed due to cancer.

The early withdrawal penalty exemption only applies to medical expenses over 7.5 percent of your adjusted gross income. If your medical expenses do not exceed that threshold, or only partly exceed that threshold, the exemption is limited. For example, if your adjusted gross income equals $45,000, only medical expenses exceeding $3,375 qualify for the exemption. If you have $2,375 in other medical expenses and a $3,000 qualifying medical surgery, the first $1,000 of the surgery is subject to the early withdrawal penalty, but the remaining $2,000 is exempt.

When you take an early withdrawal from your 401k plan, even for a medical surgery, you still have to pay income taxes on the distribution and, if applicable, the 10 percent early withdrawal penalty. The income tax rate varies from person to person, depending on into which tax bracket you fall. The income tax applies to the entire distribution, even if part or all of the early withdrawal penalty is waived.