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TheStreet Open House

A 401(k) Can Be Penalty Free Before Age 59.5

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NEW BERLIN, Ill. ( TheStreet) -- Did you realize there is a provision within the Internal Revenue Code that allows you to start taking distributions from your 401(k) plan before you reach age 59.5? This little-known section of the code, §72(t)(2)(A)(v), can be a real dandy if you happen to fit the requirements.

Here's how it works: If you're participating in your company's 401(k) plan and decide to leave employment at any time during or after the year you reach age 55, there will be no penalty for taking distributions from the plan. Normally, any distribution (other than specifically-qualified distributions such as rollovers) before age 59.5 would result in a 10% penalty.

Early access to a 401(k) is available in certain cases, easing the way toward a better-funded retirement.

Although we refer to the 401(k) throughout this article, by the way, this code provision applies to all ERISA-qualified employer-established defined contribution plans, which includes 401(k), 403(b) and others.

It is important to note that these distributions qualify only when you take them from a company-established defined contribution plan such as a 401(k) -- not an IRA account.

Again: This provision does not apply to IRA accounts. To maintain the penalty-free aspect, the funds must not be rolled over into an IRA before you start taking the distribution. The funds have to stay in the 401(k).

This is a critical distinction you need to completely understand before starting a distribution, since a mistake would take away the option completely.

Lastly, the Pension Protection Act of 2006 made one additional change to the code: The age limit for this provision is reduced to 50 for retiring police, firefighters, and medics; they can take distributions from their plans penalty-free at that age or after.

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