Can I claim exemption to 401K 10% penalty if I withdraw 401K funds at age 55 and retired from full time position in 2017.
However, I did get rehired by same employer in in part time position in 2018. I was out of work for almost 7 months.
No, there is no “exemption” from either taxes or penalty (except for the use of rule 72T, which I described in a recent answer, so check the section on investments). That rule requires substantially equal regular withdrawals from your plan — not just one withdrawal. What you should have done is roll it over into an IRA rollover account, where the money could keep growing. There would still be a penalty on withdrawals made before at 59-1/2 — but the whole idea is/was to keep the money growing tax-deferred!
If you did make this withdrawal in 2017, immediately check with your tax preparer because you are going to owe a lot of money in taxes and penalties on the return you will file in a few weeks!