Dear Ready:

Although you generally must wait until age 59½ to make withdrawals from your 401(k) without incurring a 10%

early-withdrawal penalty, the IRS allows for a separation of service exception for certain workers. Also known as the “Rule of 55,” if you quit, were laid off, or otherwise terminated from your job during or after the year you turn 55, you can take withdrawals from your 401(k) or 403(b) penalty-free from the account associated with that job.   

That said, you are still required to pay income taxes on any withdrawals from your 401(k) or 403(b) in the year they were taken. Given this, you may want to consider setting aside some of the withdrawal to pay taxes. Moreover, IRAs are not eligible for this exception, so for those accounts, you must wait until age 59½ to take withdrawals without any penalty.

If you have further questions about your investments, withdrawing money from your investments, or tax implications, contact our office. I am here to help provide you with guidance on effective planning strategies for your retirement.

This article is a service of Jason Johnson, Personal Family Lawyer®. Call our office today at 410-570-1671 to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.