Typically, you must wait until you reach age of 59 1/2 to take money out of your 401k plan without paying a penalty. However, the Internal Revenue Service allows several exceptions to this rule, one of which allows you to take penalty-free distributions if you retire after turning 55 years old. After you take the distribution, complete all the appropriate forms when you file your income tax return to avoid the penalty. However, you still must pay income taxes on the distribution.
Request a distribution from your 401k plan by completing the appropriate paperwork, which is available from your 401k plan administrator. You may take a distribution because you have left your job.
Report the amount of the distribution as a taxable pension and annuity distribution on your income taxes using Form 1040. This amount counts as taxable income and will be taxed at your marginal tax rate. You cannot avoid this tax, even if you wait until you are age 59 1/2 or older to take distributions.
Complete Form 5329 to avoid paying the extra 10 percent early withdrawal penalty on your distribution. Report the amount of the distribution on line 1 and also report that amount on line 2. Next to line 2, write "01" to signify you owe no penalty because you left your job in the year you turned age 55 or later. Because the IRS does not limit the amount of this exception, this eliminates any early withdrawal penalty.