How to Withdraw From Your 401(k) at 55 Without Penalty
We commonly receive the question, “When can I withdraw money from my 401(k)?” While the answer is technically “whenever you want to,” there are penalties you’ll need to look out for if you want to withdraw from your 401(k) before retirement.
After working hard for so many years, it’s only natural to want to know when you can reap the benefits of that time and effort. In this article, we’re going to explore how you can withdraw from your 401(k) at age 55 without penalty.
What is the 401(k) Early Withdrawal Penalty?
If you take money out of your 401(k) before you’re at least 59½, your withdrawal will incur a 10% penalty. This is on top of the income taxes you must already pay.
However, you have an opportunity to distribute from your 401(k) starting at age 55 without penalty, provided you meet two criteria:
- You are no longer employed by the company with which the 401(k) is affiliated.
- You left that employer during or after the calendar year in which you reached age 55.
This is called the “Rule of 55”, and it also applies to 403(a) and 403(b) accounts.
Furthermore, many qualified retirement plans of public safety employees, such as police officers, firefighters, and EMTs, allow for distributions even earlier (at age 50 vs. 55) without penalty.
How to Withdraw From Your 401(k) Early Without Penalty
If you’re thinking about taking a 401(k) withdrawal from an old employer plan between the ages of 55 and 59½, keep the following four factors in mind.
- It doesn’t matter why your employment ended
It doesn’t matter whether you were fired, quit, or were laid off. As long as you are no longer employed by the company maintaining the plan, and your employment was terminated during or after the year you turned 55, you will qualify for penalty-free early withdrawals from that 401(k).
Additionally, you don’t even need to be retired to avoid paying penalties. If you have a 401(k) with Company ABC and quit at age 57, you’ll be able to access those savings without penalty—even if you immediately take a job with Company XYZ.
- The rule only applies to the assets in the 401(k) plan maintained by your former employer
If you move the assets out of your former employer's 401(k), you lose the ability to withdraw them without penalty. For instance, assets in an IRA have their own rules regarding a penalty-free early withdrawal. This means anything that you’ve rolled over from your 401(k) to an IRA will generally no longer be eligible for penalty-free early withdrawals, unless you qualify for a different exemption (consult your tax advisor to see which exemptions apply).
If there’s a possibility you may need to tap into the savings in your 401(k), you may want to hold off from rolling those assets over to an IRA until you turn 59½.
- The “Rule of 55” only applies to the date employment ended—not when you start taking distributions
This is important for those entering retirement early. For example, if you retired from Company ABC at age 50, you would still be subject to the penalty tax if you take distributions from that company’s 401(k) at age 55.
Remember: If your employment ended before the year in which you turned 55, you’ll have to wait until age 59½ for penalty-free withdrawals.
- You may be able to take withdrawals from multiple 401(k) accounts without penalty
Let’s say you leave Company ABC at age 56 and immediately take a job with Company XYZ. After a year, you decide you’re ready to retire for good at the age of 57. You could take penalty-free distributions from the 401(k) plans administered by both Company ABC and Company XYZ.
Crafting a Retirement Plan That Works For You
Just because you can take penalty-free early withdrawals doesn’t necessarily mean you should. It’s often better to let the money in your 401(k) grow for as long as possible in order to capitalize on years of tax-deferred or tax-free growth.
However, in the event that you need to tap into those savings at a younger age, make sure you’re following all the rules to avoid penalties and sticking with your comprehensive financial plan.
This information is not intended to provide individualized tax or legal advice. Discuss your specific situation with a qualified tax or legal professional.
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