So someone who retires at age 53 must wait until age 59.5 before taking retirement withdrawals, while someone who retires at age 56 can take withdrawals immediately from the former employer's retirement plan (but not from other plans). In fact, the former employer can come back to work, for example at age 57, and continue to make penalty-free plan withdrawals.
For absolutely no reason whatsoever, the retirement-at-age-55 exception applies only to 401(k) plans and other employer retirement plans, but not to IRAs, even if funds from a 401(k) plan had been rolled over into the IRA.
In order to make the above simple rules more complicated, a further exception (section 72(t)(10)) provides that the retirement-at-age-55 exception becomes the retirement-at-age-50 exception for certain "public safety employees" making withdrawals from their government defined benefit pension plans. Public safety employees include state or local government workers whose principal duties require specialized training in the area of police protection, firefighting services, or emergency medical services.
So a police officer can retire at age 50 and immediately start collecting a penalty-free pension, while the DMV clerk must wait until retirement at age 55.
The retirement-at-age-50 exception-to-the-exception for public safety employees was added by the Pension Protection Act of 2006, when Congress recognized that "public safety employees often retire earlier than workers in other professions." Congress did not note that public safety employees also often retire with bigger pensions than other employees, and some hard workers are able to find second jobs in their sprightly early 50s.
§ 72 Annuities; certain proceeds of endowment and life insurance contracts.
(1) Imposition of additional tax.
If any taxpayer receives any amount from a qualified retirement plan (as defined in section 4974(c)), the taxpayer's tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income.
(2) Subsection not to apply to certain distributions.
Except as provided in paragraphs (3) and (4), paragraph (1) shall not apply to any of the following distributions:
(A) In general. Distributions which are—
(i) made on or after the date on which the employee attains age 591/2, ***
(v) made to an employee after separation from service after attainment of age 55, ***
(10) Distributions to qualified public safety employees in governmental plans.
(A) In general. In the case of a distribution to a qualified public safety employee from a governmental plan (within the meaning of section 414(d)) which is a defined benefit plan, paragraph (2)(A)(v) shall be applied by substituting “age 50” for “age 55”.
(B) Qualified public safety employee. For purposes of this paragraph, the term “qualified public safety employee” means any employee of a State or political subdivision of a State who provides police protection, firefighting services, or emergency medical services for any area within the jurisdiction of such State or political subdivision.