You have taken a great first step in your decision making process by thinking about the tax implications before you touch the money. While taking a large distribution immediately after an unexpected job loss, may not be the best option for everyone, it might be what is right for you.
For most retirement distributions before age 59 and 1/2, there is an additional tax penalty of 10% (this is the "early distribution penalty".) There are some limited exceptions to the early distribution penalty. The one you are referring to is the exception that applies when the taxpayer separates from service with the employer after they have reached age 55. This exception only applies to employer-sponsored plans (such as a 401(k) or a 403(b) plan) and does not apply to individually owned retirement accounts (traditional IRA, etc.)
IRS: Exceptions to Tax on Early Distributions
You should also consider that the 401(k) distribution will still be subject to ordinary income tax, just not the additional 10% penalty. Plan for and be prepared to pay taxes on the entire distribution you are considering at the highest tax rate you are subject to based on the rest of your taxable income for the year. Since you were working, and you will be receiving severance pay for the rest of the year, a large 401k distribution could push you into a higher tax bracket than you would normally fall into.
Edited 6/27/24 6:53A PST @OTISFIELDJACKIE @dmertz
Clarissa
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