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What is the rule of 55 for retirement plan withdrawals?

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?

Apr 11, 2012 by Frederick from Brighton, CO in  |  Flag
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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.


1 Comment   |  Flag   |  Apr 13, 2012 from Orland, IN

Question: I was laid off at age 54 but didn't decide to officially retire from that company until after I was 55. Do I qualify for this rule? And what happens if I get another job?

Flag |  Jan 26, 2013

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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

Comment   |  Flag   |  Apr 21, 2012 from Plano, TX

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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.

View all 4 Comments   |  Flag   |  Apr 11, 2012 from Columbus, GA

I planned on taking a distribution from my 401k under the 55 rule and paying off my mortgage because I had to take a lesser paying job. Then rolling the rest into an IRA. I talked to a financial advisor that told me I could roll it over to an IRA and still take the distribution without penalty. Which I did do a direct rollover for the entire amount. Once I found out I stopped the distribution. Now I am stuck unless there is an exemption for early distributions on IRAs that I qualify for. I knew about the regular taxes and the 10 % percent penalty exemption from a 401k. This advisor assured me on several times I could take the distribution without penalty. Is there anyway I can take a early distribution from an IRA without the penalty? I am considering legal action but don't know if that will be beneficial. I have got to pay off my mortgage. Thanks for any info you can provide.

Flag |  Apr 29, 2016

My only other option that I see is take an even larger distribution to pay the penalty or take a later distribution to pay that penalty and pay more penalty on the penalty distribution. Gotta love it. Thanks again.

Flag |  Apr 29, 2016

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