We’ve all thought about what our retirement will look like, and, maybe how exactly we can retire earlier than expected to experience more of what life has to offer. You’re likely enrolled in a plan at work through a 401(k) or 403(b) plan, and while thoughts of retirement are on the horizon, you may think there’s no way for you to retire early without incurring penalties if you try to access your retirement funds. That may not necessarily be true under a special provision found in the revenue code.


The Code Section

Per Internal Revenue Code §72(t)(2)(A)(v), a provision exists for 401(k), 403(b), and other qualified retirements plans that allows penalty-free distributions if you have terminated your service at your current company, through lay-off, retirement, and even if fired after attainment of age 55. This rule doesn’t apply to those 401(k) plans at former employers; it only applies to the funds in your retirement account with your current employer.

Example 1

Devin turns age 55 in Year 1. In Year 2, he retires from his job at XYZ Corp. Devin can take distributions from his XYZ Corp 401(k) plan without being subject to the 10 percent early distribution penalty.

Example 2

Devin retires from XYZ Corp in Year 1 when he is age 50. Devin turns age 55 in Year 6. In Year 7, he requests a distribution from his XYZ Corp 401(k) plan. This distribution would still be subject to the 10 percent early distribution penalty (unless another exception applies) because Devin was not age 55 when he retired.

This same penalty-free distribution is also available to those qualified public safety employees who are enrolled in governmental plans that terminate employment starting the calendar year they turn 50. This is a different provision that does not apply to traditional 401(k) plans.


Tax Impacts

All distributions will otherwise be treated regularly from an income tax perspective. Distributions from a qualified plan generally will still be included in taxable income for the year it is withdrawn. Distributions from Roth 401(k)s, in contrast, will be distributed tax-free and will not affect taxable income for the year it is withdrawn.



Starting retirement a few years earlier may introduce hurdles, most commonly from a cash flow perspective – that’s why it’s important to plan. We recommend talking with your CPA and financial advisor to figure out a plan that works for you and your family. At the end of the day, retirement means more time for you, your hobbies, family, and more free time in the day to enjoy each day as it comes. Contact our office today to discuss how we can help you best plan for retirement.