Penalty-Free Withdrawals From Your 401(k)

I’m 56 and will be leaving my job in a few months. Can I really withdraw money from my 401(k) without penalty after that? I thought the 10% early-withdrawal penalty applied to any 401(k) withdrawals before age 59½.

You generally have to pay a 10% penalty if you withdraw money from your traditional IRA or 401(k) before age 59½. But there’s a special rule for 401(k) plans: If you leave your job in the calendar year you turn 55 or later, you can withdraw money from that employer’s 401(k) without an early-withdrawal penalty.

This rule applies only if you leave your job at age 55 or later. You can still get hit with the 10% early-withdrawal penalty if you withdraw money from another employer’s 401(k) before age 59½ if you left that job before you were 55.

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Also keep this rule in mind when deciding whether to roll money over from a 401(k) to an IRA after you leave your job. If you leave your job at age 55 or older but then roll the 401(k) over to a traditional IRA, you’ll generally have to wait until age 59½ to tap the money without penalty. (There are a handful of exceptions that allow penalty-free IRA withdrawals, such as using the money to pay for health insurance when unemployed or using up to $10,000 for a first-time home purchase.)

For more information, see this IRS Tax Topic fact sheet about the early-withdrawal rules. See IRS Publication 590-B, Distributions from Individual Retirement Arrangements, for more information about the early-withdrawal penalty and exceptions.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.