I am 55 yrs old now. I plan to quit the job in November 2013 and take out about $2000/mo from 401K to retire. I read some where that when I quit my job at 55 or after , I can take out the money from 401K without penalty. Is this true ?

Yes it's true - no penalty is due if you are separated from service in the calendar year you turn age 55 or later from the company where the 401(k) is located. Note that this does not apply to any other 401(k) plans you may have from previous employers, nor to IRA plans - so if you plan to do this do not roll your 401(k) to an IRA. And just to be clear - although there is no 10% early withdrawal penalty you will have to pay ordinary income tax (federal and state/local if applicable where you live) on all withdrawals.

Is there any rule how long (days,weeks,years) after I leave the company I can take out 401k without penalty. For instance, I plan to quit the job in Nov 1 2013 and start taking out from 401K in Jan 2014.

The only rule is that you must be separated from service, so your plan is OK, in theory. The rub is that often the 401(k) plan administrator may take longer than just two months to process your withdrawal request. They must receive notice from your employer that you are no longer on roll, and then update their own systems. My suggestion is that you call the plan administrator as soon as you are off roll and ask how to go about getting a distribution in January.

In addition to what ebaines said, some plans value their funds at specific times. So distributions can only be done on their schedule. So you really need to check with the plan admins about how distributions will work.

Here is another problem.
When I leave the company, the company 401k rules give me only 3 options:
1. Take a lump sum.
2. Rollover to an IRA or other 401k plan.
3. Take some withwrawal and rollover the rest to an IRA.
My best choice seems to be option 3. I plan to withwraw 20K and rollover the rest to an IRA in Jan 2014. To avoid 10% early penalty, in 2015, 2016, 2017, I plan to convert 20K each year to a Roth IRA from traditional IRA. Of course, I pay taxes on 20K when I convert.
I have some money in Roth IRA now that is holding for more than 5 years I can draw if I need it in 2015-2017.
Please advise if this strategy will work to avoid 10% penalty early withwrawal ? I already quit my job. I am 55 yrs old and moved to other state.

The problem with this strategy is that if you take a withdrawal from the Roth IRA when you are under age 59-1/2 you lose the advantage of tax-free growth. So you must wait till 2017 before taking any withdrawals from the Roth. There is also a 5-year waiting period to avoid taxes on the growth in the account, so if you put money into the Roth in 2014 you can't withdraw it until 2019 without tax consequences.

You may be better off taking the lump sum from the current 401(k) and investing it in treasuries, munies, or some other vehicle so that your money is relatively safe and you can use it whenever you need it, until you reach age 59-1/2 and can tap into your IRA without penalty.

Can you clear up something about Roth IRA for me. I have been contribute average about $4000 each year since 1999-2012. Am I correct to say starting in 2014 can I in theory withdraw $4000 a year the principal without 10% penalty ?

Am I correct to say starting in 2014 can I in theory withdraw $4000 a year the principal without 10% penalty ?

No, that's not correct. If you take a withdrawal prior to reaching age 59-1/2 from your Roth IRA you will owe income tax plus 10% penalty on the portion of the distribution that is attributable to earnings. The portion of the withdrawal that is attributable to your original contribution is not taxable nor subject to the penalty. Here's an example: if over the years you have contributed $56K to your Roth IRA ($4K/year for 14 years), and the account is now valued at $100K, that means 56% of the account value is attributable to your contributions and 44% is attributable to earnings. If you take a withdrawal of $4K prior to reaching age 59-1/2 (and assuming its not a hardship withdrawal, as defined by the IRS), you will pay income tax on 44% x $4K = $1,760 of income plus penalty of 10% x $1,760 = $176.