Photo credit: jb
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.
If you happen to be over age 55 (technically, if you’re in the calendar year you’ll reach 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 will apply to the withdrawal.
This provision only applies to QRPs, such as a 401(k) or 403(b), and 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.
Sterling Raskie, MSFS, CFP®, ChFC®
The latest in our Owner’s Manual series, A 401(k) Owner’s Manual, was published in January 2020 and is available on 
A Medicare Owner’s Manual, is updated with 2020 facts and figures. This manual is available on 
Social Security for the Suddenly Single can be found on Amazon at 
Sterling’s first book, Lose Weight Save Money, can be 
An IRA Owner’s Manual, 2nd Edition is available for purchase on Amazon. Click the link to choose the 
Jim’s book – A Social Security Owner’s Manual, is now available on Amazon. Click this link for the 
And if you’ve come here to learn about queuing waterfowl, I apologize for the confusion. You may want to discuss your question with Lester, my loyal watchduck and self-proclaimed “advisor’s advisor”.
Two practical points that trip people up on this one, both on the withholding side. First, distributions from a 401(k) under the rule of 55 are still “eligible rollover distributions,” so the plan is required to withhold a flat 20% federal tax on anything paid to you — it isn’t optional and the W-4R can’t reduce it below 20%. For someone in the 12% bracket that means over-withholding on every withdrawal and a refund in April; the workaround is to take slightly larger distributions than needed and treat the excess withholding as prepaid tax, or, where the plan permits, set up periodic payments (monthly or quarterly, expected to run a year or more) which are not eligible rollover distributions and can be withheld at whatever rate the W-4R specifies, including zero. Second, the point David raised is bigger than it looks: a surprising number of plans only permit a lump-sum total distribution after separation, and if the only way to get at the money is all at once, the whole balance becomes taxable income in one year and the 55 exception saves the penalty but not the bracket jump. Anyone planning to use this rule should ask the administrator two questions before separating — does the plan allow partial withdrawals, and does it allow periodic payments — and if the answer to both is no, rolling only the portion you won’t need before 59½ into an IRA and leaving the rest in the plan is often the better split. Also worth saying: the exception applies to the plan of the employer you separated from at 55+, not to an old 401(k) from a job you left at 45.
My CFP informed me that this rule is in effect (assuming I separate) IN the calendar year I turn 55, not when I turn 55. Your article clearly states AT age 55 or older. There is a material difference here.
Article has been adjusted. Thanks for reaching out.
I was advised that one additional requirement is that your individual plan allows for this, it is not mandatory. I checked with the trustees of my plan to make sure that my plan did prior to retiring early.
That is true, to a certain extent. My understanding is that the plan administrator could refuse a partial withdrawal, but cannot refuse a total withdrawal. So there could be a case (and I have seen this) where the administrator will only allow a complete withdrawal of the account, which would limit the effectiveness of the post-55 rule.
In such a case one would need to plan for the amount that they’d like to be treated with no penalty (to take in cash) and then rollover the remainder to an IRA or other QRP. In other words, the penalty exemption does not rely on the plan administrator’s rules, it is an exemption within the Internal Revenue Code.
For this purpose, is SEP IRA considered a QRP?
Sam – no, a SEP-IRA is still an IRA, for the purposes of this particular provision.
jb