What is the rule of 55 for retirement plan withdrawals?Retirement Plans
I'm 55 right now and am planning on retiring in June. I have a 401k with my current employer and an IRA. I've heard about the Rule of 55 in regards to a 401k, but does it to apply to IRAs as well?
Hi Frederick, the "rule of 55" only applies to what the IRS calls "qualified plans" like your 401k. The rule means you can avoid the 10% early withdrawal penalty on distributions from your 401k if you are 55 or older and separate from service (meaning you quit/lose your job with that employer).
The "rule of 55" does NOT apply to IRAs though (they aren't considered "qualified" money according to the IRS). So if you retire at 55 and leave your money in your 401k, you can withdraw however much you need and avoid the 10% early withdrawal penalty. Of course, any withdrawal is still considered taxable income to you.
If instead you retire and then roll your 401k to an IRA, the rule of 55 exception no longer applies. Once the money is in an IRA, you have to wait until age 59 1/2 to avoid the 10% early withdrawal penalty. So definitely consider your income needs between now (age 55) and age 59 1/2 before you think about rolling your 401k to an IRA.
Yes, it is what is known as a 72(t) distribution - The Internal Revenue Code section 72(t) and 72(q) can allow for penalty free early withdrawals from retirement accounts under certain circumstances. These sections can allow you to begin receiving money from your retirement accounts before you turn age 59-1/2 generally without the normal 10% premature distribution penalty. Use this calculator to determine your allowable 72(t)/(q) Distribution and how it maybe able to help fund your early retirement. http://www.dinkytown.net/java/Retire72T.html
No, it works a bit different after you roll your 401(k)Rule of 55) to a self-direted IRA(72(t) withdrawal). Leaving it and rolling both have benefits and limitations. You can avoid the 10% premature withdrawal penalty by taking funds from your 401(k) as long as you retire at 55 or after. You will still owe ordinary Income Tax, though. You have some flexibility in the amount you can take and how often you are required to take the withdrawals but you are limited to the investment options of the plan. A 72(t) withdrawal requires you to base the withdrawal amount on a calculation(usually between 3.5% to 5%) and you must continue taking the same amount(SEPP, Substanially Equal Preiodic Payments) for the greater of 5 years or until 59 1/2. Once again, you avoid the 10% penalty but not Income Tax. If you are looking for supplemental income for your entire retirement, I would look hard at the flexibility and control of an IRA and 72(t) since it requires you to not pull too much out too soon in your retirement. If you need a one time withdrawal (to pay off a high-interest debt, for instance) or do not know how much you will need each year until 59 1/2, I would consider leaving it in the 401(k) and taking withdrawals from there. I always recommend consulting a CPA before retiring, even if it is only for the first year or two of retirement.