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The Rule of 55: What Do You Need to Know?

The Rule of 55: What Do You Need to Know?

July 06, 2021

If retirement is on your horizon, you may not expect to be able to withdraw any funds from your 401(k), 403(b), or other tax-deferred plan until you reach age 59.5—unless you want to pay a 10 percent penalty.[1] However, one little-known IRS rule allows you to begin making penalty-free withdrawals from a tax-deferred account at age 55 (if you meet a few criteria): the Rule of 55.

The IRS Rule of 55

The Rule of 55 allows for early distributions from a 401(k) (or 403(a) or (b)) if you separate from your job during the calendar year you turn 55.[2] You'll still need to pay taxes on any distributions from your tax-deferred account, but can avoid the 10 percent penalty.

As with any IRS rule, there are several qualifications and caveats. Some wrinkles associated with this rule include:

  • You must leave your job the year you turn 55 or later—if you retire the year you turn 54, you'll have to wait until you turn 59.5 before you begin taking withdrawals.[3]
  • Public safety employees (including police officers, EMTs, firefighters, and air traffic controllers) can make penalty-free withdrawals the year they turn 50.[4]
  • It applies only to employer-sponsored tax-deferred plans—not IRAs.[5]
  • You can continue taking early withdrawals even if you start working at another job.[6]

When to Take Advantage of the Rule of 55

The Rule of 55 is designed to try to ensure that those who lose their jobs in their mid-fifties will not be hit with a penalty for accessing their retirement dollars just a little early. If you find yourself in this situation, it often makes sense to use the Rule of 55 to withdraw some of your retirement funds to supplement any unemployment benefits you receive, even if you move on to a new job. The Rule of 55 can also give you the flexibility to retire before age 60 without wondering how you will be able to make ends meet.

It can also make sense to begin withdrawing from your 401(k) early if you have a significant portion of your retirement funds in tax-deferred accounts. Because tax rates may rise in the future, it could make more sense to withdraw 401(k) funds at today's tax rates. If you have any earned income, you can also use these withdrawn 401(k) funds to contribute to a Roth IRA up to the amount of your earned income or $6,000, whichever is less.[7] This allows these funds to grow tax-free.

As with any retirement decision, it is a good idea to talk this over with your financial professional, who can run your numbers and help you identify any issues specific to your situation that you may not have considered.

Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

 All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

 This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.











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