Retiring Early? 5 Things to Know About the Rule of 55 and Your 401(k)

Hoping to access your 401(k) early? With the rule of 55, you may be able to access and take early withdrawals from your 401(k). Here’s what you need to know. of 55: Withdraw early from your 401(k) without penalty if you qualify
3 min read
Photo by TD Ameritrade

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) 55 rule 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 Summary Plan Description you received (or can access electronically) for your workplace retirement plan.

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. 


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.

images/gallery/icons/Target with Arrow.png

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.


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.


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.


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). Also, be aware that your employer might automatically roll over your 401(k) account to an IRA once your 401(k) balance drops to $5,000 or below. You won’t lose this money, but it may end up in an IRA that you did not choose. Finally, if you made Roth contributions to your 401(k), these withdrawals are usually tax-free, so determine if taking withdrawals from your Roth account in the 401(k) plan makes sense or if your should withdraw from the taxable account.

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


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
Call Us

Do Not Sell or Share My Personal Information

Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.

Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

Before rolling over a 401(k) to an IRA, be sure to consider your other choices, including keeping it the former employer’s plan, rolling it into a 401(k) at a new employer, or cashing out the account value keeping in mind that taking a lump sum distribution can have adverse tax consequences. Whatever you decide to do be sure to consult with your tax advisor. 

TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.


Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.

TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2023 Charles Schwab & Co. Inc. All rights reserved.

Scroll to Top