Q&A: Taking retirement savings without penalty

Q: I am 58 years old. I was laid off from the company. Can I withdraw some of my 401(k) without paying 10% penalty? I know that I have to pay income tax on withdrawals. Is this true? — Kim Quan, Tucson

A: So sorry to hear about the layoff. I hope this answer will ease some of the pain.

Taxable withdrawals taken from a qualified retirement savings plan before age 59½ are typically subject to a 10% early distribution penalty, says Ben Norquist, president and CEO of Convergent Retirement Plan Solutions in Brainerd, Minn.

"Thankfully, there are a number of exceptions to this general rule," he says. "And, one of these exceptions — likely the one to which you are referring — is available for plan participants who separate from service with an employer after age 55."

According to the IRS, the key to qualifying for this exception is that separation from service must occur in or after the year in which the employee attains age 55, says Norquist. "In other words, an individual who separates from service with an employer at age 52 cannot qualify for this exception by simply waiting until he or she attains age 55 to take distribution from the plan."

So, it appears that you were age 55 or older at the time of the layoff, which, says Norquist, would indicate that this exception may well be available to you.

One additional cautionary note: "A common misunderstanding of this penalty exception occurs when individuals mistakenly believe it is permissible to roll over a qualified plan distribution to an IRA and then claim this penalty exception on subsequent distributions from the IRA," says Norquist.

As you can see, the rules concerning the 10% early distribution penalty can be fairly nuanced, says Norquist. To learn more about the 10% early withdrawal penalty on qualified plan distributions taken before age 59½, read Topic 558 — Additional Tax on Early Distributions from Retirement Plans Other Than IRAs.

Robert Powell is editor of Retirement Weekly, contributes regularly to Paste BN, The Wall Street Journal and MarketWatch and teaches at Boston University.