What Age Can I Draw From 401k Without Penalty

Rule of 55

Employer-sponsored, taxation-deferred retirement plans like 401(thou)s and 403(b)s have rules about when you can access your funds. As a general rule, if you withdraw funds before historic period 59 ½, y'all'll trigger an IRS tax punishment of 10%. The good news is that in that location'south a way to take your distributions a few years early on without incurring this penalty. This is known every bit the rule of 55. If you're contemplating early retirement, y'all should know how the dominion of 55 works. If you have retirement planning questions, consider talking to a financial advisor.

What Is the Dominion of 55?

Under the terms of this rule, you lot tin withdraw funds from your current job'south 401(k) or 403(b) plan with no 10% tax penalisation if you lot leave that job in or after the year you turn 55. (Qualified public safety workers can first fifty-fifty earlier, at 50.) It doesn't matter whether you were laid off, fired, or merely quit.

The distributions are not completely tax free: Like all withdrawals from a traditional 401(1000) or 403(b), you exercise have to pay income revenue enhancement. Simply the 10% tax penalty is bypassed in this scenario.

In addition, note that employers are not obliged to allow early withdrawals; and, if they practise allow them, they may require that the entire amount exist taken out in one lump-sum withdrawal. This could expose you to a higher income tax.

This rule applies to current – non former – 401(grand) or 403(b) plans. The authorities does not permit penalty-free withdrawals before 59.v from plans you had with a previous employer. If y'all want access to that money under the dominion of 55, you lot would accept to transfer those funds into your current 401(g) or 403(b) plan.

Planning Out the Timing of Your Withdrawals

The timing of your early withdrawals is important, says Dave Lowell, certified financial planner and founder of Up Your Money Game.

"If you were employed for nearly of the yr and had a relatively high income, then it makes sense to non withdraw money under the rule of 55 in that calendar year, since it will add together to your total income for the twelvemonth and perhaps consequence in you moving to a higher marginal tax bracket," Lowell says.

The better strategy in that scenario may be to apply other savings or accept withdrawals from subsequently-tax investments until the side by side agenda rolls around. This may result in your taxable income being much lower.

Alternatives to Rule of 55 Withdrawals

Rule of 55

The dominion of 55, which doesn't use to traditional or Roth IRAs, isn't the only fashion to get money from your retirement plan early. For example, you won't have to pay the penalty if y'all accept distributions from a 401(yard) early for these reasons:

Y'all become totally and permanently disabled.
You laissez passer away and your casher or estate is withdrawing money from the program.
You're taking distributions to pay deductible medical expenses that exceed 7.5% of your adapted gross income.
Distributions are the upshot of an IRS levy.
Yous're receiving qualified reservist distributions.

Yous can also avoid the 10% early withdrawal penalty if early distributions are made every bit part of a serial ofsubstantially equal periodic payments, known as a SEPP plan. You have to be separated from service to qualify for this exception if you're taking coin from an employer'due south plan, but you're non subject area to the 55 or older requirement. The payment amounts you lot'd receive come from your life expectancy.

Bottom Line

The rule of 55 allows y'all to have money from your employer's retirement plan without a tax penalty earlier age 59.v. Simply that doesn't necessarily mean you should. Whether an early retirement is correct for you depends largely on your goals and overall fiscal state of affairs.

"Retiring before than 62 means no Social Security income," Lowell says. "The person needs to brand certain they know where their income is coming from."

For example, will you have a pension that pays out regular annuity payments to rely on? Or will you be able to depict from taxable investment accounts, savings accounts, CDs or other assets to encompass your expenses in early retirement?

If you plan to retire early but you don't recall you lot'll need to tap into your 401(thousand) just yet, consider what else yous could do with it. Leaving information technology with your employer to go on growing is one option; rolling it over to an IRA is another. The more idea you give to how and when yous'll need to employ those assets beforehand, the better you tin can position yourself for a financially sound early retirement.

Tips for Retirement Planning

Meet with your fiscal advisor to talk over the pros and cons of retiring early. Finding a qualified financial counselor doesn't have to be difficult. SmartAsset's free tool matches you with up to three financial advisors who serve your surface area, and you tin can interview your counselor matches at no price to make up one's mind which ane is right for y'all. If y'all're fix to detect an counselor who can help you achieve your financial goals, get started now.
If you're considering leaving the workforce ahead of your normal retirement age, acquire how it changes your retirement income program. Utilise a retirement computer to approximate how much you'll need to retire. A 401(chiliad) figurer tin give you an idea of how much y'all'll be able to grow your savings. This is important to know alee of your target retirement date.

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to abode buying, credit cards, banking and modest business organization. She's worked direct with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from cardinal Virginia, she now lives on the Northward Carolina coast forth with her ii children.