How to Tap Your 401(k) or IRA Penalty-Free

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How to Tap Your 401(k) or IRA Penalty-Free

There are exceptions to the rules that require you to keep money in retirement accounts until age 59½.

I’m 56 years old and about to retire. Is there a way to withdraw money from my 401(k) and traditional IRA without paying the 10% penalty for withdrawals before age 59 ½?

You’re in luck. Because you will be older than 55 when you leave your job, you can take penalty-free withdrawals form you 401(k) plan (the distributions will still be subject to income taxes). And you can take money from a traditional IRA penalty-free at any age as long as you follow certain rules.

These early-out payments are known as 72(t) distributions, named for the section of the tax code that authorizes them. The provision allows you to take “substantially equal” distributions for at least five years or until age 59½, whichever is longer. If you have several IRAs, you can choose to take distributions from just one account. Or, if you have only one IRA, you can split off a portion into a new IRA to satisfy your early-distribution needs and let the remainder continue to grow tax-deferred.

Try the free calculator at to estimate how much you can withdraw under three different distribution methods. You can even work the numbers in reverse: Start with how much you would like to withdraw each year and you can see how much you need in an IRA to satisfy the withdrawal schedule. But there’s a big penalty if you deviate from the distribution schedule: You will owe the 10% withdrawal penalty retroactively on all your withdrawals.

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