What Is the Rule of 55?

The Rule of 55 is an IRS provision that allows certain workers to access their 401(k) savings without incurring a penalty after age 55. To qualify, you must leave or lose your job during the year you turn 55 or later, and you can only withdraw from your most recent workplace’s plan.

Pros and Cons of the Rule of 55

Advantages of the Rule of 55

One of the primary benefits of the Rule of 55 is that it allows you to tap into your retirement savings before age 59½ without triggering a 10% penalty. Additionally, you can continue to take distributions even if you get a new job, and early withdrawals can lower required minimum distributions (RMDs) after age 72.

Disadvantages of the Rule of 55

However, the Rule of 55 only applies to your most recent employer’s 401(k) plan. Early withdrawals can also eat into your savings, reducing the overall value of your portfolio. Moreover, you won’t have Social Security benefits until age 62, which means you’ll rely more on your savings each year.

How to Use the Rule of 55 to Retire Early

1. Leave Your Job at Age 55 or Later

To qualify for early withdrawals using the Rule of 55, you must leave your job the year you turn 55 or later. You cannot leave your job before age 55 and then begin to take distributions once you reach the qualifying year.

2. Withdraw From Your Current 401(k) Only

The Rule of 55 only allows penalty-free early withdrawals from the 401(k) plan you invested in at your most recent job. If you have funds in other employer-sponsored retirement accounts or IRAs, you’ll need to wait until age 59½ to access those funds without a penalty.

3. Work With a Financial Advisor

It’s always a good idea to consult with a financial advisor before making changes to your retirement plan. A financial advisor can help you weigh your options and strategize how much to withdraw each year to support yourself while keeping your tax obligation as low as possible.

Other 401(k) Early Withdrawal Exceptions

Beyond the Rule of 55, the IRS allows early withdrawals from your 401(k) without penalties in cases of financial hardship, such as medical expenses, foreclosure risk, burial or funeral expenses, permanent disability, or being a victim of a qualified natural disaster.

The Bottom Line

If you’re age 55 or older, you may qualify for penalty-free distributions from your 401(k) using the Rule of 55. However, it’s essential to consider whether this is the best option for your long-term retirement plan. Consulting with a financial advisor can help you make an informed decision.

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