How to Access Your 401(k) Prior to 59 1/2 without Penalty

There is a little-known part of the IRS tax code that allows you to access your 401(k) or 403(b) prior to 59 and a half without penalty.

Traditionally, the penalty is 10%, but the Rule of 55 gives you access without paying a penalty, but it comes with certain requirements.

If you leave your job in the calendar year you turn 55 or older for any reason and your employer has stipulated that you have the ability to tap into your plan, you can do so without penalty. Some plans may require you to withdraw your entire balance as one lump sum, which would most certainly be a bad deal.

To maximize the Rule of 55, there are a number of roll-over strategies you can use. For example, if you have an old 401(k) or IRA, you can roll those balances into your employer's plans, and then when you separate you will have unfettered access to the total amount between age 55 and 59 and a half.

If you have specific circumstances or know that you'll have heavy cash flow needs between those ages, this is a solid, penalty-free option.

You have to get all the shifting done before you leave your employer. You won't be able to roll over a balance after you are no longer employed.

There are some caveats. You can only withdraw funds from your most recent employer, and you can't make penalty-free withdrawals from your IRA. The Rule of 55 is very specific and only applies to narrow circumstances.

People are retiring at younger and younger ages, and if that's the case for you in that period between age 55 and 59 and a half, the Rule of 55 is a great option. You will want to apply Power of Zero principles during those years because if you don't you may bump into a higher tax bracket than you expect or accidentally suffer a 10% penalty.

Another reason you may want to take money out of your 401(k) using the Rule of 55 is to take advantage of historically low taxes. You can use the money to fund your lifestyle as well as your Roth IRAs and LIRPs. 

A 72T is another viable option for some people, but it comes with artificially low limits that may be an obstacle. The 72T works for a lot of people, it just doesn't work for everybody, particularly those that want to retire early.