55 yo and Unemployed. Can I access my 401K without penalty?

[cindytax]

Hi There, 

I was separated in May from my employer and turned 55 in September.  

- Can I access my 401K without penalty?

- Am I restricted to which 401Ks I can access (does it have to be only the one from my most recent employer)?

- If I find work and I'm re-employed, can I still access the 401K without penalty? 

[BeckyLeeH · Accepted solution]

Generally, anyone can make an early withdrawal from 401(k) plans at any time and for any reason. However, these distributions typically count as taxable income. If you're under the age of 59½, you typically have to pay a 10% penalty on the amount withdrawn. The IRS does allow some exceptions to the penalty, including:

• total and permanent disability
• unreimbursed medical expenses (greater than 7.5% of adjusted gross income)
• employee separation from service at age 55 or older (age 50 for most public safety employees) but only from the plan at the job you are leaving
  
  The following link may help you better understand your 401(k) distributions
  

  An Early Withdrawal From Your 401(k): Understanding the Consequences
  

  https://turbotax.intuit.com/tax-tips/retirement/an-early-withdrawal-from-your-401k-understanding-the...
  
  
  

[cindytax]

You guys are awesome!!  thank you so much!

One last final part to the question - If I become employed before the end of the year can I still withdraw funds from my 401K without penalty?

Final note... I checked on IRS.GOV and the 55 yo/separation rule exception (not subject to 10% penalty) appears to apply as long as it happens in the same year (https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-o...)

[KarenL4]

Hi, Cindytax,

Sorry to hear you lost your job. 

Generally, anyone can make an early withdrawal from 401(k) plans at any time (see this article) at any time and for any reason. However, these distributions typically count as taxable income. If you're under the age of 59½, you typically have to pay a 10% penalty on the amount withdrawn. The IRS does allow some exceptions to the penalty, including:

• total and permanent disability
• unreimbursed medical expenses (greater than 7.5% of adjusted gross income)
• employee separation from service  during or after the year the employee reaches age 55 (age 50 for most public safety employees) but only from the plan at the job you are leaving (not from other 401(k)s)

A complete list of possible exceptions can be found here.

Note, the funds must be in the former employer's 401(k) to be eligible for this separation exception.  If you roll the funds into an IRA, for example, before making your withdrawal, this age 55 exception will not apply. You can keep withdrawing from this 401(k), even if you get another job later, as long as you are continuing to make withdrawals from the original (separating) employer.

Hope this helps.

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Regards,

Karen

TurboTax Expert