Q: I have enough money to retire, but I'm not 59 1/2 years old yet. Will I get penalized for retiring and tapping into my 401(k)?

No, not necessarily. There are provisions in the 401(k) rules that can allow early retirees to use their funds before the typical retirement savings minimum age of 59 1/2 years old.

If you're at least 55 years old, you can take advantage of the "separation from service" rule if you retire early. This says that as long as you're no longer working for the sponsoring employer, you can use your qualified retirement plan assets without a penalty. This exemption applies if you retire early, or if you get downsized or otherwise lose your job.

Second, you can choose to use the "substantially equal periodic payments" (SEPP) exception at any age, which allows you to withdraw from your 401(k) in an annuity-like manner without penalty. Annual withdrawal amounts are set by an IRS formula based on your life expectancy and the catch is that once you start taking annual withdrawals under the SEPP exemption, they must continue for at least five years or until you turn 59 1/2, whichever comes later.

So yes, it's certainly possible to use your 401(k) early if you choose to retire. If you qualify (you're 55 or older), the separation from service exemption is preferable since it doesn't lock you into a series of withdrawals. However, the bottom line is that you have two options available that can allow you to take advantage of your good savings history and retire early.

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