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401(k) Withdrawals at Age 55

Can You Take a 401(k) Withdrawal at 55?

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You just turned 55 and you want to withdraw money from your 401(k) plan. Are you allowed to? Maybe.

It depends on whether you are still working for the company that sponsors the plan; if you’re no longer working for that company then it depends on how old you were when you left employment there.

Still Working for the Company

Most 401(k) plans do not allow regular withdrawals at age 55 while you are still working for the company that sponsors the 401(k) plan. By “regular withdrawal” I mean a withdrawal that is not subject to penalties and does not require you to qualify based on special circumstances.

Instead of a regular withdrawal you may be able to take a 401(k) loan, or qualify for a hardship withdrawal, if your 401(k) plan allows them. Not all 401(k) plans are required to offer loans or hardship withdrawals.

You can also check with your plan administrator to see if they have a special provision that allows for something called an “in-service” withdrawal.  “In-service” means you are still employed by the company sponsoring the plan.

No Longer Working for the Company

If you want to take money out of an old 401(k) plan – meaning a plan from an employer whom you no longer work for – the rules are a little different.

If you left your previous employer after you reached the age of 55, then you can take a withdrawal from the 401(k) plan.  This withdrawal will be considered taxable income but it will not be subject to the early withdrawal penalty tax. This applies even if you are not yet age 59 ½. This applies only if you have left your money inside the 401(k) plan.

If you rolled your old 401(k) plan to an IRA, this provision does not apply. If you take a regular withdrawal from an IRA before age 59 ½ it is subject to income taxes plus an early withdrawal penalty tax.

What If You Left Your Previous Employer Before Age 55?

If you left your previous employer before age 55, but now you are over 55, sorry, the special age 55 withdrawal provision does not apply. Any withdrawals you take will be subject to the penalty tax, unless you can roll your 401(k) plan to an IRA and qualify for an exception to the penalty.

Planning Opportunities

401(k) money is creditor protected. You will void this protection by cashing in a 401(k) plan early. If you are in financial trouble, cashing in a 401(k) plan early may be the worst thing to do.

If you are retiring early (before age 60 for example), in some cases it can make sense to leave money in a 401(k) plan until you reach age 59 ½. In this way you can take withdrawals if you need to.

If you could retire at age 54, it might make sense to wait until you reach age 55. This way you have more access to your 401(k) money and can take withdrawals that are not subject to an early withdrawal penalty tax.

Inherited 401(k)s

If you are a beneficiary and inherited a 401(k) plan that rules above do not apply. You will need to read about Inherited 401(k) Plans to see what rules apply to you. It depends on whether you were a spouse, or non-spouse, and the age at death of the 401(k) owner.

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