Recessionary times can prompt an early retirement. What about your retirement funds in your qualified plans if you need access to them before turning age 591/2? Will you be penalized for taking them?
Most people have a 401(k) plan at work. Contributions to these plans are tax-deductible from working income and can include matching funds from employers. But money withdrawn from them comes out as taxable income, taxed as ordinary income. This is true for your own IRA.
The federal government allowed such qualified plans - including IRAs - so people will save for their retirement. To foster waiting to your retirement years rather than dipping into those savings, qualified plan distribution rules impose a penalty for withdrawals made before you turn 591/2. The penalty is a straight 10% tax on whatever you withdraw. And that's in addition to the withdrawal being added to your income for whatever income tax that will trigger.
That's a lot of tax to pay. If you withdraw from 401(k)-type plans or your IRA in tax years in which you have working income, you'll lose a substantial fraction of your withdrawal to income and penalty taxes since ordinary income tax rates can increase fast.
But there is an exception to the 10% penalty rule. And that's for withdrawals from a 401(k) if you've been laid off or retire from your work at or you're over 55 years of age. If so, you'll not have to pay the penalty tax, but whatever you take out will still be taxed as ordinary income.
Realize that this rule does not pertain to your IRA; you must wait until you turn 591/2 before the 10% penalty tax is dropped. However, if you choose to make periodic and equal withdrawals for at least 5 year or until you turn 591/2, you can also avoid the penalty tax on those periodic withdrawals from your IRA.
Watch Out for Penalties:
There's a strong tendencies to rollover you 401(k) into your IRA for more investment options. But if you want access to those funds before 591/2, don't do the IRA rollover.
But then again, if you were to retire and leave your money in your former employer's 401(k), the terms of that employer plan might pre-empt the federal rule. You may have to wait until you reach a specific age such as 62 or 65. Or, you may have access to your money only once during the year. So, check with your company's plan administer about your access to those funds.
If you choose to retire and want access to the money, try to retire at the end of the year so you can withdraw your money at the beginning of the next year. That way you won't have any working income to add the withdrawal to which would make them taxed at higher ordinary income tax rates.