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Frequently Asked Question

I want to retire before age 59½. How do I avoid the 10% early distribution penalty on retirement payments from my 401k?

Answer: If you want to retire before age 59½ and begin taking distributions from your 401k plan, you will generally be subject to a 10% early distribution penalty. The early distribution penalty is the cornerstone of the government's campaign to discourage us from plundering our savings before our golden years.

Of course, with the strong markets, many of us are able to retire before 59½ and we would like to begin getting at our nest egg to do so. Luckily, there are a couple of ways to do this without paying the 10% penalty.

Leaving Your Job On or After Age 55

If you are retiring from the company that is sponsoring your plan and you are at least 55 at retirement, you can begin to withdraw monthly income from your 401k with no penalty. You will owe income tax on the amount. You will need to check with the company's benefits administrator for details. Your employer is also required to give you a "Summary Plan Description" (SPD) annually and upon request. The SPD should also address early retirement options in your 401k plan. If you rollover your 401k into an IRA, this option is not available to you.

Substantially Equal Periodic Payments

The substantially equal periodic payment exception is available to anyone with a 401k plan, regardless of age, which makes it an attractive escape hatch. It is called a Section 72(t) distribution. In a 72(t) withdrawal, the distributions must be "substantially equal" payments based upon your life expectancy. Once the distributions begin, they must continue for a period of five years or until you reach age 59½, which ever is longest. The full rules and life expectancy tables can be found in IRS Publication 590. This option generally give you the least retirement pay out available.

These two exceptions are only relevant if you are younger than 59½, since there is no penalty for withdrawals over this age.

This is for educational purposes only. The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.


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