The rule of 55, penalty free 401k withdrawal details

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  • #61099
    CaryRaleigh
    Participant

    I will like to retire at age of 55. The rule of 55 will allow me to tap my 401K account. However, I am not clear on how exactly the process works. For example, say I have 500K in 401k and need 50K every year for retirement expenses.
    Am I allowed to take 50K from age 55 onwards each year penality-free?
    Basically, I am asking, Do I need to withdraw all 500K at age 55 or allowed to withdraw every year 50K?
    Does this process depend on my employer’s approval/control or I have full freedom to withdraw funds?

    I am with the same employer for the last 20 years, they switched from 403(b) to 401(k). So, I have money with Fidelity in a frozen account and a current 401k account with Fidelity. Can I withdraw both 401k/403b account at age 55?

    Any help will be greatly appreciated.

    #61110
    Alan S.
    Participant

    All distributions from both plans will be penalty free after separation from service at 55 or later. However, the plan provisions determine what form of distributions are allowed. Some plans restrict distributions to a lump sum, others allow some flexibility, and still others complete flexibility. You will have to check your plan’s SPD or call the administrator to determine how broad your distribution options will be.

    If restricted to a lump sum distribution, the additional taxes would probably offset the benefit of the penalty waiver. In such a case, many retirees are forced into a direct rollover and an inflexible 72t plan to waive the penalty. These plans are generally a last resort, but may still be needed. The better option is flexible distributions as needed from your former plan, at least until 59.5. So check with your plan to see if their distribution options are workable.

    #61112
    CaryRaleigh
    Participant

    Thanks, Alan for the very helpful reply, greatly appreciate your time and expertise.

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