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Most of the time, when taking a distribution from a 401(k) or other Qualified Retirement Plan (QRP) prior to age 59½, there generally is a 10% penalty that applies. That is, unless one of the exceptions applies – hardship primarily, although there are others.
If you happen to be over age 55 when you leave employment, there is another exception that applies. Any distribution that you take from the QRP, as long as you were at least 55 years of age when you left employment, will not be subjected to the 10% penalty, only ordinary income tax.
This provision only applies to QRPs, not to IRAs. So if you’re leaving employment at or after age 55 but before reaching 59½, it can be in your best interest to not rollover your QRP to an IRA, at least until after you reach 59½. Even if you don’t need the money right away, it could be beneficial to have the source of funds available penalty-free.
For retiring police, firefighters and medics, the age for this exception is 50 – so these folks can take distributions from their QRPs after age 50 if they’ve left employment without penalty.An IRA Owner's Manual or if you'd prefer the Kindle version (and let's face it, ALL the cool kids do!), you can find that at this Kindle version link.