The Rule of 55 is an IRS regulation that allows individuals to withdraw funds from their employer-sponsored retirement plans, such as 401(k)s and 403(b)s, without incurring the typical 10% early withdrawal penalty. This rule applies to individuals who leave their job in or after the year they turn 55.
Key Points About the Rule of 55
- Age requirement: Individuals must be at least 55 years old and have left their job in or after the year they turn 55 to qualify for the Rule of 55.
- Plan eligibility: The Rule of 55 applies to withdrawals from current employer-sponsored retirement plans only. Withdrawals from previous employer plans are not eligible.
- Tax implications: While the Rule of 55 eliminates the 10% early withdrawal penalty, withdrawals are still subject to income tax.
- Employer discretion: Employers are not obligated to allow early withdrawals under the Rule of 55. Some employers may require that the entire account balance be withdrawn in a lump sum.
- Alternatives: There are other exceptions to the 10% early withdrawal penalty, such as withdrawals for qualified medical expenses, disability, or death.
Benefits of the Rule of 55
- Avoid early withdrawal penalty: The Rule of 55 allows individuals to access their retirement savings early without incurring the 10% penalty.
- Flexibility: Individuals can use the funds from their retirement accounts to fund early retirement, cover unexpected expenses, or invest in other opportunities.
- Tax planning: Withdrawals under the Rule of 55 can be used to supplement income during low-earning years or to avoid moving into a higher tax bracket.
Considerations Before Using the Rule of 55
- Reduced retirement savings: Withdrawing funds from retirement accounts early can reduce the amount of money available for retirement.
- Income tax implications: Withdrawals are subject to income tax, which can increase the overall tax burden.
- Employer restrictions: Some employers may not allow early withdrawals under the Rule of 55.
- Other options: There may be other, more tax-efficient ways to access retirement savings early, such as loans or hardship withdrawals.
The Rule of 55 can be a valuable tool for individuals who need to access their retirement savings early. However, it is important to carefully consider the potential benefits and drawbacks before withdrawing funds under this rule. Individuals should consult with a financial advisor to determine if the Rule of 55 is the right option for their specific situation.
The Rule of 55 Explained
FAQ
How does the rule of 55 work?
Can I use the rule of 55 if I get another job?
Can you retire at 55 and still work?
Can I retire and collect Social Security at 55?
What is the purpose of the Rule of 55?
“The rule of 55 was developed to help people who decide to retire, whether by their choice or their employer’s, to be able to take money out of their retirement accounts such as a 401 (k) or 403 (b) prior to the age of 59 1/2 without paying the 10% penalty,” Simpson says.
How do you qualify for the rule of 55?
To be eligible for the rule of 55, you’ll need to leave your job during or after the calendar year in which you turn age 55. The rule allows penalty-free 401 (k) withdrawals for workers between ages 55 and 59 1/2 who leave a job during that age range.
How do you obtain a default under the Rule of 55?
Rule 55. Default; Default Judgment (a) Entering a Default. When a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend, and that failure is shown by affidavit or otherwise, the clerk must enter the party’s default. (b) Entering a Default Judgment. (1) By the Clerk.
How can the rule of 55 help you take early 401(k) withdrawals?
Your 401 (k) plan can grant you early withdrawals via the Rule of 55, but it doesn’t have to do so. Your company can’t hold your money hostage, but it can decide to pay you via a one-time lump sum if you want to withdraw early.