Retiring Early? 5 Things to Know About the Rule of 55

Hoping to access your 401(k) early? With the rule of 55, you might be able to take early withdrawals from your 401(k). But the rule is narrowly defined and specific. Here’s what you need to know.

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Key Takeaways

  • The rule of 55 lets you take penalty-free early 401(k) withdrawals
  • There’s an extra benefit for public safety employees
  • The rule of 55 is specific, so be sure to double-check your eligibility before taking a withdrawal

If you’ve ever invested in a 401(k), 403(b), or similar tax-deferred plan, you likely know that you’re generally expected to keep the money in the account until you’re at least 59 1/2—if you don’t want to be stuck with a penalty. However, there is a way around the penalty if you want access to your money a little earlier.

With the rule of 55, you have the potential to begin taking distributions from your 401(k) before you normally could. Here’s what you need to know about using the 401(k) rule of 55 to your advantage.

What Is the Rule of 55?

The IRS rule of 55 recognizes that you might leave or lose your job before you reach age 59 1/2. If that happens, you might need to begin taking distributions from your 401(k). Unfortunately, there’s usually a 10% penalty—on top of the taxes you owe—when you withdraw money early. This is where the rule of 55 comes in. If you turn 55 during the calendar year that you lose or leave your job, you can actually begin taking distributions from your 401(k) without paying the early withdrawal penalty. You still have to pay taxes on your withdrawals, but you won’t have to pay the extra penalty.

Not only does the rule of 55 work with a 401(k), but it also applies to 403(a) and 403(b) plans. If you have a qualified plan, you might be able to take advantage of this rule. You can verify the status of your plan by checking with the IRS or your plan administrator.

5 Things to Know About the Rule of 55

Before you start withdrawing money from your 401(k), though, it’s important to understand five things about the IRS rule of 55. 

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1. Public safety employees get an extra five years.

Police officers, firefighters, EMTs, and air traffic controllers are considered public safety employees, and they get a little extra time to access their qualified retirement plans. For them, the rule applies in the calendar year in which they turn 50. Double-check to ensure that your plan meets the requirements, and consider consulting a professional before withdrawing money.

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2. You can withdraw only from the plan specific to the employer.

Before you start taking distributions from multiple retirement plans, it’s important to note that the 401(k) withdrawal rules for those age 55 and older apply only to your employer at the time you leave your job. So you can only take those penalty-free early 401(k) withdrawals from the plan you were contributing to at the time you left (or were fired from) your job. The money in other retirement plans must remain in place until you reach age 59 1/2 if you want to avoid the penalty.

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3. You must leave your job the calendar year you turn 55 or later.

The rule of 55 doesn’t apply if you left your job at, say, age 53. You can’t start taking distributions from your 401(k) and avoid the early withdrawal penalty once you reach 55. However, you can apply the IRS rule of 55 if you’re older and leave your job. If you get laid off or quit your job at age 57, you can start taking withdrawals from the 401(k) you were contributing to at the time you left employment.

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4. The balance must stay in the employer’s 401(k) while you’re taking early withdrawals.

The rule of 55 doesn’t apply to individual retirement accounts (IRAs). If you leave your job for any reason and you want access to the 401(k) withdrawal rules for age 55, you need to leave your money in the employer’s plan—at least until you reach age 59 1/2. You can take withdrawals from the designated 401(k), but once you roll that money into an IRA, you can no longer avoid the penalty. And if you’ve been contributing to an IRA as well as your 401(k), you can’t take penalty-free distributions from your IRA without meeting certain requirements.

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5. You can withdraw from your 401(k) even if you get another job.

Finally, you can keep withdrawing from your 401(k), even if you get another job later. Let’s say you turn 55 and retire from your work. You decide you need to take penalty-free withdrawals under the rule of 55 and begin to take distributions from the employer’s plan. Later, at age 57, you decide you want to get a part-time job. You can still keep taking distributions from your old plan, as long as it was the 401(k) you were contributing to when you quit at age 55—and you haven’t rolled it over into another plan or IRA.

Should You Use the Rule of 55?

Even if you’re eligible to withdraw money penalty-free from your 401(k) or other qualified retirement plan early, consider carefully. Just because you can doesn’t mean you should. Remember, if you’re taking money from your retirement account, it can no longer benefit from (potential) compounding returns. If you retire early, or if you were laid off and you need the distributions to cover living expenses, it could make sense. But if you get another job and cover your costs that way, it might not make sense to begin drawing down your 401(k).

Review your choices carefully and consider consulting with a retirement specialist to determine what might work for your situation.

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Key Takeaways

  • The rule of 55 lets you take penalty-free early 401(k) withdrawals
  • There’s an extra benefit for public safety employees
  • The rule of 55 is specific, so be sure to double-check your eligibility before taking a withdrawal

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