Leave the 401(k) where it is. 72(t) is the other door.
Free primer: rule of 55. Keep vs roll vs cash-out: rollover guide and calculator. Paid steps assume you are actually leaving this employer in the year you turn 55 or later, and you want a file — not a slogan. Withdrawal order after the bridge: tax-efficient withdrawals.
Do this in order
Confirm the calendar-year test before the resignation email. IRC §72(t)(2)(A)(v) / Pub. 575: distributions from a qualified plan other than an IRA after you separate from service in or after the year you reach age 55 skip the 10% additional tax. Ordinary income tax still applies. You can be 54 in January and turn 55 in November of the year you leave — the year is what Form 5329 exception 01 reads. Pub. 575’s George example is the other way: separated at 49, took a distribution the year he turned 55 — exception does not apply, because he left before that year. Do not resign in December of the year you are 54 and “fix it in January.”
Call the plan administrator before your last day. Write the answers down. Partial withdrawals after separation? Minimum amount? Frequency (ad hoc vs installment)? Form W-4P or 20% mandatory withholding? Can you roll old 401(k)s in before the last day? If the plan only pays a lump sum, the rule of 55 still avoids the 10% — it dumps a tax spike into one year. That is an IRMAA, ACA-subsidy, and bracket problem, not a penalty problem. A verbal “I think we allow installments” is not the SPD.
Do not open the IRA rollover envelope on autopilot. Default “roll to IRA” advice is correct at 62. It is wrong at 56 if this 401(k) is your bridge. The age-55 exception does not travel. IRA withdrawals before 59½ owe the 10% unless another exception applies (SEPP, disability, terminal illness). Leave the money in this plan, take what you need penalty-free, roll the leftover after 59½ — or after you know you will not need it. The leave-a-job checklist is the other file: 401(k) rollover playbook.
Old 401(k)s from previous employers do not count. The exception attaches to the plan of the employer you are separating from at 55+. A 2018 401(k) sitting at a recordkeeper is still a 10% plan until 59½ (or a 72(t) on that IRA if you roll it). If this plan accepts inbound rollovers, move those old balances in before your last day so the pile you might draw sits in the plan you are leaving. After you leave, most plans stop accepting roll-ins. Ask in step 2, not the week after the cake.
Public safety and governmental 457(b) are different statutes. Get them in writing. Qualified public safety employees (and, after SECURE 2.0, private-sector firefighters): distributions from a governmental plan — or the firefighter plan — after separation in or after the year you reach age 50 or 25 years of service under the plan, whichever is earlier (IRC §72(t)(10); Topic 558; Form 5329 exception 01). That is not “anyone in a uniform at 50.” Governmental 457(b) distributions are generally not subject to the 10% additional tax at all, except amounts rolled in from a 401(k)/403(b)/IRA that would have been. Do not mix 457 folklore with a 401(k) you still have to qualify.
Size the first-year draw as a paycheck replacement, not a celebration. Target: annual spending minus Social Security (if any) minus taxable-brokerage cash you already planned to use. Keep a named HYSA sleeve for the first two years of spending so you are not forced to take a second 401(k) pull in a down market — sequence-of-returns. The 401(k) is the bridge, not the vacation. If the number only works as a lump-sum dump of the whole balance, you wanted a different retirement date, not a bigger check.
Withholding is 20% or W-4P. Code 1 on the 1099-R is not a failed exception. An eligible rollover distribution paid to you is 20% mandatory federal withholding (IRC §3405(c)) even when the 10% additional tax does not apply. Periodic payments that are not eligible rollover distributions use Form W-4P. Size extra federal (or 1040-ES) so April is not a surprise. If the 1099-R is code 1 (early, no known exception) because the plan does not code rule-of-55, file Form 5329 with exception 01. Code 2 means the plan already applied an exception. Code G is a direct rollover — that is the envelope you did not want in step 3.
Run MAGI before you pull a large first-year chunk. ACA premium tax credits read this year’s MAGI. IRMAA reads MAGI two years later — IRMAA calculator, IRMAA playbook. 2026 ordinary brackets (Rev. Proc. 2025-32): 12% ends at taxable $50,400 single / $100,800 MFJ; 22% ends at $105,700 / $211,400; standard deduction $16,100 / $32,200. A lump that fills 24% to “get it over with” can cost more in subsidy and IRMAA than the 10% you correctly avoided. Fill 12% on purpose if you have a gap year; do not invent a gap year by cashing the plan.
72(t) SEPP is the other door — for an IRA, or if you already left too young. IRC §72(t)(2)(A)(iv) / Notice 2022-6: substantially equal periodic payments over life expectancy. Three methods: RMD, fixed amortization, fixed annuitization. Interest rate for the two fixed methods is the greater of 5% or 120% of the federal mid-term AFR for either of the two months before the first payment — type a rate, do not scrape this month’s AFR into a static page. From a 401(k), you must already be separated before SEPP begins. Payments continue until the later of five years from the first payment or age 59½. Someone starting at 56 is locked past 59½ to the fifth anniversary. This is how you tap an IRA you already rolled, not a second slogan on the same 401(k).
Isolate the SEPP IRA before the first valuation. Do not mix two exception regimes. After the SEPP balance is valued, adding money, rolling part out, or taking one extra dollar is a modification (Notice 2022-6 §3.02(e)). Modification before the later of five years or 59½: 10% additional tax on this year’s distributions plus recapture of the 10% you avoided in every prior year of the series, plus interest (IRC §72(t)(4)). The allowed one-way switch is amortization/annuitization → RMD method, then stay there. Do not start a 72(t) on an IRA and also take ad-hoc rule-of-55 pulls from a 401(k) you then roll into that same IRA. Two exception regimes in one year, one account, is how people create a penalty they cannot unwind.
Roth 401(k) is not a tax-free ATM at 56. After 59½, the leftover can move. A qualified Roth 401(k) distribution needs the 5-year clock and 59½ / disability / death. Rule of 55 can waive the 10% on the taxable piece of a nonqualified Roth 401(k) distribution; it does not make the earnings tax-free. Traditional pre-tax dollars in the same plan are ordinary income with no 10%. After 59½ you no longer need the exception — then a direct rollover of the leftover is the same file as everyone else’s (keep vs IRA vs cash-out). New account, new beneficiary forms: 401(k) spouse default vs IRA form — titles audit.
Hard-stop list: rolling this 401(k) to an IRA the week you leave; resigning in the year you turn 54 and waiting; treating an old 401(k) as rule-of-55 money; a lump-sum dump into 24% because “the penalty is gone”; skipping the inbound rollover question until after the last day; starting a 72(t) on the same IRA you might raid for a roof; mixing a governmental 457(b) “no penalty” story with a 401(k) that still has one; treating Roth 401(k) earnings as qualified at 56; ignoring 20% withholding and then underpaying estimated tax; leaving the 1099-R as code 1 with no Form 5329; cashing out to simplify (ordinary income + 10% before 59½ if the exception never attached). If the plan will not pay partials and the lump does not fit MAGI, you wanted a later last day or a 72(t) on a sliced IRA — not a bigger cake.
One-page decision
Year you turn 55+ (or public-safety 50 / 25 years, in writing). Call the plan: partials, inbound old 401(k)s, withholding. Leave this 401(k) where it is. Draw a paycheck-sized amount. Watch MAGI for ACA this year and IRMAA two years out. 72(t) is the IRA door, isolated, locked to the later of five years or 59½. After 59½, roll what is left. Nobody is required to take a lump because the 10% is gone.
Worked example (educational, not tax advice): Jordan, single, turns 56 in August 2026, last day March 2026 — calendar year they are 56, so the exception attaches. Current-employer 401(k) $480,000 pre-tax. Old 2018 401(k) $90,000. Traditional IRA $40,000. Taxable brokerage $25,000. Spend $62,000/year, no Social Security yet. Keep a $14,000 brokerage sleeve; first-year plan draw $48,000. Leave the $480k: penalty $0. Taxable after the 2026 standard deduction $16,100 is $31,900 — all in 12% (12% ends $50,400). Federal ≈ $3,580 ($12,400 × 10% + $19,500 × 12%). If the plan pays that $48,000 as an eligible rollover distribution to Jordan, 20% withholding is $9,600 (a refund machine, or elect W-4P if it will pay installments). Roll-the-plan-on-last-day trap: the same $48,000 from the new IRA is still ordinary income plus 10% additional tax of $4,800 (Form 5329, no exception 01). 72(t) other door, if the IRA rollover already happened: isolate the $480k, age 56, Treas. Reg. §1.401(a)(9)-9 Table 1 single-life factor 30.6. RMD method ≈ $15,686/year (too small for the $48k spend). Fixed amortization at the Notice 2022-6 5% floor (example rate, not this month’s 120% AFR) ≈ $30,956/year, locked until the fifth anniversary (later than 59½). Taking an extra $17k from that SEPP IRA to top up spending is a modification — recapture of the 10% on every prior SEPP payment, plus interest. Old $90k: inbound to the current plan before March, or it stays a 10% plan. Type your own ages and MAGI; this is not a form you file.