The rule of 55 applies to you if: You leave your job in the calendar year that you will turn 55 or later (or the year you will turn 50 if you are a public safety worker such as a police officer or an air traffic controller). You can leave for any reason, including because you were fired, you were laid off, or you quit.
The rule of 55 is an IRS provision that allows you to withdraw money from your 401(k) or other qualified retirement plan without the 10% early withdrawal penalty if you leave your job in or after the year you turn 55.
The IRS rule of 55 recognizes you might leave or lose your job before you reach age 59½. If that happens, you might need to begin taking distributions from your 401(k). Unfortunately, there's usually a 10% penalty—on top of the taxes you owe—when you withdraw money early.
If you have debt or bills, or you simply want to use your money now and you're comfortable paying taxes and early withdrawal penalties, then cashing out is an option. You could withdraw all your funds, but you can also do a partial withdrawal, leaving some of your savings in your 401(k) account.
Withdrawing money from your plan can cost you
20% may be withheld from your distribution for federal income tax. You may have to pay additional state and local income tax. The money you withdraw could put you in a higher tax bracket, and you may owe more taxes.
Deferring Social Security payments, rolling over old 401(k)s, setting up IRAs to avoid the mandatory 20% federal income tax, and keeping your capital gains taxes low are among the best strategies for reducing taxes on your 401(k) withdrawal.
What Is the Rule of 55? Under the terms of this rule, you can withdraw funds from your current job's 401(k) or 403(b) plan with no 10% tax penalty if you leave that job in or after the year you turn 55. (Qualified public safety workers can start even earlier, at 50.)
401(k) Tax Basics
There's no way to take a distribution from a 401(k) without owing income taxes at the rate you're paying the year you take the distribution. Except in special cases, you can't take a distribution from your 401(k) at all until you've reached age 59.5.
You can start receiving your Social Security retirement benefits as early as age 62. However, you are entitled to full benefits only when you reach your full retirement age. If you delay taking your benefits from your full retirement age up to age 70, your benefit amount will increase.
If you're at least age 59½ and your Roth IRA has been open for at least five years, you can withdraw money tax- and penalty-free. See Roth IRA withdrawal rules.
Retiring with little to no money saved is not impossible, but it can present some challenges to your financial plan. Depending on where you're starting from, you may need to delay Social Security benefits, work longer, or drastically reduce expenses to retire with no money saved.
Starting this year, if your employer plan allows, you can withdraw $1,000 from your 401(k) per year for emergency expenses, which the Secure 2.0 Act defines as "unforeseeable or immediate financial needs relating to personal or family emergency expenses." You won't face an early withdrawal penalty, but you will have to ...
To be eligible for a hardship withdrawal, you must have an immediate and heavy financial need that cannot be fulfilled by any other reasonably available assets. This includes other liquid investments, savings, and other distributions you are eligible to take from your 401(k) plan.
The short answer is that yes, you can withdraw money from your 401(k) before age 59 ½. However, early withdrawals often come with hefty penalties and tax consequences.
For simplicity's sake, let's assume a hypothetical investor has one IRA with an account balance of $100,000 as of December 31 of the prior year. To calculate the RMD the year they turn 73, they would use a life expectancy factor of 26.5. So the RMD would be $100,000 ÷ 26.5, or $3,773.58.
The rule of 55 is an IRS provision that allows workers who leave their job for any reason to start taking penalty-free distributions from their current employer's retirement plan in or after the year they reach age 55.
Withdrawal Options
Direct rollover to another qualified retirement Plan or IRA. Payout Frequency • One-time lump sum • Installments or periodic payments Delivery Method • For paper check payout option, payees have the ability to request standard or expedited delivery.
By age 50, you should have six times your salary in an account. By age 60, you should have eight times your salary working for you. By age 67, your total savings total goal is 10 times the amount of your current annual salary. So, for example, if you're earning $75,000 per year, you should have $750,000 saved.
If you are a service retiree, you can work for a private industry employer not associated with any CalPERS employer without restrictions and continue to receive your CalPERS retirement allowance . If you are a disability retiree, there are limitations on private sector employment .
A 401(k) loan would give you penalty-free early access to your money in a pinch, while an IRA would not. Target retirement age. If you'd like to retire before turning 59½, a 401(k) is better.
But it does mean you should work with a CFP® to understand any tax consequences, while potentially finding ways to keep more of your money. If you leave the federal government at age 55 or older, you can withdraw from your TSP without fear of a penalty—as long as you retire immediately.
Roll over your 401(k) to a Roth IRA
You can roll Roth 401(k) contributions and earnings directly into a Roth IRA tax-free. Any additional contributions and earnings can grow tax-free. You are not required to take RMDs. You may have more investment choices than what was available in your former employer's 401(k).
The short answer is no, taking a distribution from your 401(k) does not impact your eligibility for (or the amount of) your Social Security benefits.
As an employee participating in any tax-deferred 401(k) plan, your retirement contributions are deducted from each paycheck before taxes are taken out. Since most 401(k) contributions are taken out on a pre-tax basis, it lowers your taxable income, resulting in fewer taxes paid overall.