Did you know that if you want to retire from work at 55, there are ways to start taking your 401K and other similar retirement plan proceeds without the early withdrawal penalty? There is a provision in the Internal Revenue Code – §72(t)(2)(A)(v) that allows you to avoid the 10% penalty on retirement plan distributions before age 59 1/2. There are certain rules to qualify:

1. The plan must be an ERISA-qualified, employer-established defined contribution plan, including 401(k)s, 403(b)s, 501(a)s, federal TSP Plans and some other qualified plans.

2. You must leave employment at your company (ether termination, retirement or resignation) during the year you turn 55 or the year after to qualify for the penalty-free distribution.

3. If you have at least twenty years of service as a police officer, firefighter or medic, you can take the penalty-free distributions starting at age 50. If you have at least twenty-five years of service in these professions, you can take the distributions penalty-free at any age.

Now remember that IRAs do not qualify for this special treatment. For an IRA, you have to use another area of §72(t) to set up a series of equal periodic payments (SEPP), which is a little more complicated and requires some calculations. I will go over the SEPP for IRAs in another post.

But this is a great way to save some penalties on a retirement distribution when you really need to get the cash before 59 1/2.

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