Definition
An IRS exception that lets you withdraw from your current employer's 401(k) or 403(b) without the 10% early-withdrawal penalty if you leave that job in or after the calendar year you turn 55 (age 50 for certain public safety employees). Income tax still applies. The exception covers only that employer's plan: it does not extend to IRAs, to plans from earlier jobs, or to money rolled out of the plan into an IRA.
Why it matters
For someone laid off or retiring in their late 50s, this is the cleanest bridge to 59½ that exists, and it is easy to lose by reflexively rolling the 401(k) into an IRA on the way out the door. It also depends on the plan allowing partial withdrawals rather than forcing a lump sum.
Example
A 56-year-old loses her job with $500,000 in that employer's 401(k) and no other income. She leaves the account in the plan and withdraws $30,000 a year until Social Security, paying income tax but avoiding the $3,000 penalty each year's withdrawal would otherwise carry. A friend in the same position who rolled his 401(k) into an IRA first now pays that $3,000 a year on top of the tax.
Put it into practice
Related terms
401(k)Substantially equal periodic payments (72(t) / SEPP)Hardship withdrawalFIRE (Financial Independence, Retire Early)
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.