Retiring early. It has a nice ring to it doesn't it? Unfortunately it's not a simple task. In fact, nearly one third of all working adults report having no savings or pension according to a recent Fed study. For the folks that do have retirement savings in place, one of the many challenges facing those who want to retire early is that pesky 10% penalty for accessing your retirement accounts prior to age 59 1/2. What if I told you that you could avoid that 10% penalty? You can and now that I have your attention, I will explain.
According to a provision in the Internal Revenue Code §72(t)(2)(A)(v), if you are employed by a company and are participating in the company's sponsored retirement plan (this includes all ERISA qualified, employer-sponsored plans such as 401(k), 403(b), etc) and you end your employment with that company for any reason in the year you turn age 55 or any year thereafter, you can take distributions directly from your company sponsored plan penalty free. As I mentioned previously, typically an early distribution (other than specifically qualified distributions) would result in a 10% penalty.
The key here is that the distribution must come directly from the company sponsored plan. This provision does not apply to IRA's. If you were to rollover your funds from your employer sponsored plan to your IRA and then take a distribution prior to age 59 1/2, you would then be subject to the 10% penalty.
Additionally, if you are a Police Officer, Firefighter or EMT, the Pension Protection Act of 2006 makes this provision available to you at age 50.