Tapping Into Your 401(k) Without an Early Withdrawal Penalty

401kThe rule for tapping a 401(k) without incurring the 10% early-withdrawal penalty requires that you are at least age 59½, but there's an exception.

If you leave your employer in the year you turn 55 or older, there's no penalty. Even so, you'll still owe tax on the withdrawal. As a result, a $10,000 payout at a 25% tax rate will cost you $2,500. However, there's no $1,000 early-withdrawal penalty tacked on to this. It doesn't matter how you separate from your job. In fact, retiring, being laid-off, or even termination will spare you the penalty. 

If you were to leave your job in January and turn 55 in December, the 401(k) payouts anytime during the year are penalty-free. However, if you retire in December and turn 55 the next January, you'd be hit with the penalty until age 59½. Reaching age 55 or older in the year you leave is the trigger, not just your 55th birthday. So if you were to leave a job at age 50, you couldn't tap that 401(k) penalty-free until you reach age 59½. But if you leave an employer at age 55 to work for another company and then leave the second position at age 57, you could withdraw from both 401(k)s penalty-free. You left both companies in the year you turned 55 or older.

This exception may come in handy for some early retirees who need to use the funds in their 401(k) for living expenses. But remember: this exception from the penalty is lost if you rollover your 401(k) to an IRA. Once the money goes into the IRA, the earliest age for penalty-free withdrawals is back to age 59½. 

An IRA, in contrast, has more investment options than a 401(k). One could split the 401(k) for a better result. For example, if you were to retire at 55 with $1 million in your 401(k), and you want to withdraw $50,000 annually for the next five years, you could leave $250,000 in the 401(k) to take advantage of the penalty exception and rollover $750,000 into an IRA to take advantage of other investment choices.

Ask your benefits manager for the details and rules of your 401(k), as there are some plans that don't allow partial withdrawals or periodic distributions.

Reference: Kiplinger's (May 2016) "When You Can Tap a 401(k) Early With No Penalty"


Like this article?

Share on facebook
Share on Facebook
Share on twitter
Share on Twitter
Share on linkedin
Share on Linkdin
Share on pinterest
Share on Pinterest

Leave a comment


We have a LOT more where that came from!

We hate spam too. We will never share or sell your information.

Call Now ButtonCall Us Now https://jsfiddle.net/7h5246b8/

Request a free consultation

We hate spam too. We will never share or sell your information.

We've been putting together as many resources as possible so that we can continue to help:

  • If you’re a current client with a signing appointment or a prospective client with a consultation and would prefer that meeting take place in your own home, we can accomplish that with a little bit of pre-planning on our part and with the addition of a laptop, smartphone, tablet or other computer in your home to facilitate this virtual meeting. For those of you that need to sign legal documents, that too can be accomplished with the use of a webcam (FaceTime etc.), so that we can witness and electronically notarize all of your important legal documents.
  • We launched the rollout of our on-demand webinar early so that new clients and our allied professionals can view the important component parts of ‘an estate plan that works’ at their convenience.  That is available on our website.
  • Live video workshops will be produced as quickly as possible and certainly ahead of our previous schedule; we will keep you posted as these events become available. Given the ‘boutique’ nature of the firm, we rarely have more than ten people in our office including team members at any one time. During this period of ‘social distancing,’ we promise to have no more than 8 people at any time.   This allows us to comply with the Governor’s directive to limit in-person gatherings.
  • The best way to communicate with us is still by phone during regular office hours of 8:30 to 5:00, Monday through Friday, or, you can email any of our team members (that is, their first name followed by @zarembalaw.com).  We will respond to these emails as quickly as possible.
  • Please continue to follow the directives of our local, state, and federal agencies. For your health and in consideration of our team who is assisting you, if you’ve scheduled an office appointment or planned to drop off paperwork and are experiencing a fever, dry cough, or shortness of breath, please contact your primary care doctor for guidance and then our office to reschedule.

Thank you, Walt and the Zaremba Team

Update to our Process

The unprecedented coronavirus pandemic has taken our entire country by surprise. We understand how difficult this time is for America’s businesses and families.  However, we believe it is vitally important that we make every effort possible to continue to offer solutions that avoid disrupting our important partnership with you, your family and friends.  As you know, estate planning is not something that should wait for a more convenient time, therefore the opportunity to address your important goals both during and after this crisis should not wait.  To that end, we have added the option of a ‘virtual consultation’ to our office process.  You will now have a choice of either meeting with us in our office or in the comfort of your own home.