Avoiding a 10% early withdrawal penalty on distributions

There is a common misconception that you have to be over 59.5 before you can take a distribution from your retirement plan and not be hit with a 10% early withdrawal penalty.

What most people don’t know is that in section 72(t) of the tax code there is a little known provision that says if you leave your employer, after reaching age 55, in some cases you can take your money without paying the 10% penalty. Keep in mind, you have you quit, retire, be fired, etc. . . after age 55. If you leave service before 55 this little known provision does not apply to you.

By the way, if you leave service earlier, maybe you could roll the funds over into a new retirement plan, sponsored by a business of yours. Then if after age 55, you retire from your business, you will probably get the 10% savings.

Keep in mind for the above planning to work, you must have a valid business, and there must be a non-tax business for you to quite the business or leave service.