Workers who leave a company in or after the year they turn 55 can withdraw funds penalty-free from their 401(k) accounts, or they can establish a series of substantially equal periodic payments, reports the IRS. Otherwise, if they are under 59 1/2, they must pay an early-withdrawal penalty tax on distributions.
Only employees who continue working for the company administrating the plan until they are at least 55 qualify for penalty-free distributions upon early retirement, according to About.com. Those who retire before they reach 55 must wait until they are 59 1/2 for penalty-free distributions. An alternative is to set up substantially equal periodic payments based upon the account balance and the estimated lifetime of the account holder. These payments must continue for at least five years or until the account holder turns 59 1/2, whichever is longer.
People under age 59 1/2 can avoid the 10 percent penalty tax on early distributions if they qualify for an exception, as reported by the IRS. Those granted an exception do not pay the penalty tax on distributions to pay medical bills that total over 10 percent of adjusted gross income. If they are permanently and completely disabled, distributions are penalty-free. They can withdraw funds penalty-free to pay bills to the IRS. Military reservists can receive penalty-free distributions when called to active duty for 180 days or more.