I feel as though every time I write one of these articles I need to put my standard disclosure. “I’m not a fan of withdrawing from your retirement accounts prior to 59 ½, but if you must, I want to show you the right way to do it.”

With that out of the way, let’s get to it.

If you leave your job at age 55 and you have a 401k, you have the ability to withdraw from your 401k and avoid the 10% early withdrawal penalty.  Now this does not work if you leave your job at age 50 or 53.  It only works if you leave at age 55 or older.

Here are a few things to consider when doing this:

  • If you roll your 401k over to an IRA,  you lose the ability to avoid the 10% penalty unless you use rule 72T. (Read about rule 72T here: https://www.retireearly365.com/accessing-your-retirement-funds-prior-to-59-5-part-two-of-four/) So if you’re thinking about making a withdrawal prior to 59 ½ then it’s best to keep your money in your 401k.
  • You can leave XYZ company at age 55 and go to work with ABC company and still make the withdrawals from your old XYZ 401k plan.  In other words, you don’t have to be retired to make the withdrawal and avoid the 10% penalty.  BUT, if you roll your old 401k into a new one, you will no longer have the ability to withdraw without a penalty.
  • This is more flexible than a 72T plan. With 72T, you’re at the mercy of the IRS formula which will limit how much you can take out.  There is no limit on how much you can take out of your 401k plan and avoid the 10% penalty.   Keep in mind, you’ll still need to pay federal and state tax on your withdrawals and those can add up quickly.
  • It doesn’t matter how you left your employer.  You might have been downsized.  Perhaps you quit or you got terminated.  Why you are not with the company anymore has no effect on you pulling money from the 401k and avoiding the penalty.


Kay just retired at 56 years old and has $175,000 in her 401k from her previous employer.  She needs to take out $25,000 from her old plan for a new car.  She can request a distribution from her 401k and avoid the 10% early withdrawal penalty.  She’ll need to request more than $25,000 because 401k’s are required to withhold 20% for federal tax and possibly state tax.  It’s likely she’ll need to take out around $28,000 to net $25,000.  However, she’ll avoid paying the $2800 in early withdrawal penalties.

Often times there are benefits to rolling your 401k to your own IRA so that you can better control the investment of your money.  However, if you have an inkling that you might need to withdraw money, then it’s best to keep your money in the 401k.

In your planning to retire early, you might be tempted to reach in and grab your retirement funds.  I’ve shown you in this blog and several other past blogs how to pull this off successfully.  Not to sound like a broken record, but, ideally it’s best to hold off accessing these funds.

Though it likely wouldn’t be tragic if you had to take some small distributions on a yearly basis to bridge the gap between your early retirement date and the start of your social security or pension, any withdrawal will be counted as income, so talk to your accountant on how this can effect on your taxes.

If you need help figuring all of this out, I’m only a few clicks away.


Live free my friends