How to Tap Your 401(k) or IRA Penalty-Free

I’m 56 years old and about to retire. Is there a way to withdraw money from my 401(k) and traditional IRA without paying the 10% penalty for withdrawals before age 59 ½?

You’re in luck. Because you will be older than 55 when you leave your job, you can take penalty-free withdrawals form you 401(k) plan (the distributions will still be subject to income taxes). And you can take money from a traditional IRA penalty-free at any age as long as you follow certain rules.

These early-out payments are known as 72(t) distributions, named for the section of the tax code that authorizes them. The provision allows you to take “substantially equal” distributions for at least five years or until age 59½, whichever is longer. If you have several IRAs, you can choose to take distributions from just one account. Or, if you have only one IRA, you can split off a portion into a new IRA to satisfy your early-distribution needs and let the remainder continue to grow tax-deferred.

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Try the free calculator at www.72t.net to estimate how much you can withdraw under three different distribution methods. You can even work the numbers in reverse: Start with how much you would like to withdraw each year and you can see how much you need in an IRA to satisfy the withdrawal schedule. But there’s a big penalty if you deviate from the distribution schedule: You will owe the 10% withdrawal penalty retroactively on all your withdrawals.

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.