Is there a way to avoid tax penalty for an early 401(k) withdrawal for medical expenses?

I made an early withdrawal on my 401(k) this year, and set aside 30 percent for the penalty and taxes. I did not indicate that it was a hardship. I ended up using almost 20 percent of that withdrawal on medical expenses that my husband and I incurred this year. Is there a way to not get penalized for the withdrawal that was spent on those medical expenses? I have already received the tax info from my plan administrator that shows that it was a "regular" 401(k) withdrawal. They told me that they cannot go back and change the withdrawal reasons.

You should report the total amount distributed from the 401(k) on Part 1, line 1, of Form 5329. On line 2 indicate the amount used for unreimbursed medical expenses, according to the form instructions. Then, deduct the allowable amount from the total distribution to determine what portion is not subject to the 10 percent early distribution penalty. However, the total amount distributed is subject to income tax as part of the taxable income for the year.

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Answered by: Ibolya Balog, CPA, is an associate professor at Cedar Crest College in Allentown, Pa.