The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 33. Getting Out Early

YOU KNOW by now that there is a 10 percent penalty levied on retirement money that is withdrawn before you reach age 59½. But there are some exceptions to that rule. Perhaps the most significant one allows employees who leave their companies at age 55 or older to take the money in corporate retirement plans without paying the penalty.

"If you actually worked on your fifty-fifth birthday, and you separated from service one day later, you can take the money," says Ethan E. Kra, chief actuary for retirement at Mercer in New York. "You could be fired, you could quit, or you could just walk out the door and not tell them where you're going. The reason is immaterial."

That may be a comfort for people in their fifties who consider their jobs tenuous. Taking another job does not disqualify you for the penalty-free withdrawal. The right to take the money at age fifty-five is independent of anything else you do.

This early payout, however, applies only to tax-qualified retirement plans like 401(k) plans, not to IRAs. Nor is it available to employees who quit working or retire before age fifty-five.

Suppose you work for a company where you qualify for early retirement after thirty years of service. Maybe you've completed the thirty years at age fifty-two. But if you quit then, your money will be locked up until age 59½. In other words, qualifying for early retirement from the company does not entitle you to use the exemption.

Of course, any money withdrawn from tax-deferred ...