If you tap your retirement funds before age 59 1/2, you'll owe a -10% early-withdrawal penalty on top of the federal and state income taxes you'll pay on each distribution.
But if you are at least 55 when you leave your job, you can take distributions from your 401(k) without paying a penalty (although you will still owe income taxes on your withdrawals).
If you transfer your funds to an IRA, you lose the “55-and-out” option.
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