[gabe233dsp]

I was laid off in 2009 and used my 401k distribution to pay for medical insurance while unemployed and for grad school tuition, rather than rolling it over. I thought I could avoid the 10% early withdrawal penalty if I took 401k distributions and used them to pay for medical insurance and/or higher education expenses. However, when I researched online and with the IRS, it appears that the penalty exception only applies if the withdrawal comes from an IRA. Is this true? Why wouldn't the exception apply to me? It seems I did the same thing that the exception was put in place for, but with my 401k instead of an IRA. If I had known this, I could have rolled over to an IRA then withdrew the money! I assume that it is too late now? If I have to pay the penalty, I will owe $3,000 that I did not budget for and be in a very dire financial position. Is there anything I can do?

[ebaines]

There are actually many differences in the details of how IRAs and 401(k) plans work. You are correct that costs for higher education qualify for an exemption from the 10% penalty if taken from an IRA, but not if taken from a 401(k), so yes - you would have been better off rolling your old 401(k) to an IRA and then taking a withdrawal from there. But as for medical expenses - in both cases you avoid the 10% penalty to the extent that your medical expenses exceed 7.5% of your income, so that's not an issue here.

You have 60 days from the time you took the withdrawal to roll the funds to an IRA. So if you're still within that time window, you can make the roilover and avoid the issue.