What is the rule of 55 and how does it work?

Asked by: Mrs. Drew Reynolds  |  Last update: April 27, 2023
Score: 4.3/5 (58 votes)

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 once they've reached age 55.

Can I withdraw money from my 401k without penalty at age 55?

If you are between ages 55 and 59 1/2 and get laid off or fired or quit your job, the IRS rule of 55 lets you pull money out of your 401(k) or 403(b) plan without penalty. 1 It applies to workers who leave their jobs anytime during or after the year of their 55th birthday.

How does the 55 rule work?

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.) It doesn't matter whether you were laid off, fired, or just quit.

How much can I withdraw from my 401k at 55?

The amount you withdraw from a tax-deferred 401(k) or 403(b) will be taxed as regular income. If you take out $40,000 from your 401(k) through the rule of 55, it will be considered as an additional $40,000 in income for the year for tax purposes.

How can I retire early with the rule of 55?

How to Use the Rule of 55 to Fund Your Early Retirement
  1. You Must Leave Your Job the Year You Turn 55—or Later. ...
  2. You Can Only Withdraw from Your Current 401(k) ...
  3. You Can Still Withdraw Early, Even If You Get Another Job.

What is the Rule of 55?

21 related questions found

Can I use the rule of 55 if I get another job?

You're allowed to return to part-time or full-time work at another company while continuing to withdraw penalty-free. Once you start using the Rule of 55 to take money out of your most recent 401(k), you're allowed to start working again.

How much money should you have to retire at 55?

Experts say to have at least seven times your salary saved at age 55. That means if you make $55,000 a year, you should have at least $385,000 saved for retirement. Keep in mind that life is unpredictable–economic factors, medical care, and how long you live will also impact your retirement expenses.

What happens to my Social Security if I stop working at 55?

If You Stop Work Before You Start Receiving Benefits

Years with no earnings reduces your retirement benefit amount. Even if you have 35 years of earnings when you stopped working, some of those years may be low-earning years.

At what age is 401k withdrawal tax free?

After you become 59 ½ years old, you can take your money out without needing to pay an early withdrawal penalty. You can choose a traditional or a Roth 401(k) plan. Traditional 401(k)s offer tax-deferred savings, but you'll still have to pay taxes when you take the money out.

How do I avoid taxes on my 401k withdrawal?

The easiest way to borrow from your 401(k) without owing any taxes is to roll over the funds into a new retirement account. You may do this when, for instance, you leave a job and are moving funds from your former employer's 401(k) plan into one sponsored by your new employer.

What benefits do you get at age 55?

Here's how getting older can save you money:
  • Senior discounts.
  • Travel deals.
  • Tax deductions for seniors.
  • Bigger retirement account limits.
  • No more early withdrawal penalty.
  • Social Security payments.
  • Affordable health insurance.
  • Senior services.

Can I cash out my 401k while still employed?

The first thing to know about cashing out a 401k account while still employed is that you can't do it, not if you are still employed at the company that sponsors the 401k. You can take out a loan against it, but you can't simply withdraw the money.

How much is taxed on a 401k withdrawal?

The IRS generally requires automatic withholding of 20% of a 401(k) early withdrawal for taxes. So if you withdraw the $10,000 in your 401(k) at age 40, you may get only about $8,000. The IRS will penalize you.

Is 401k withdrawal considered income for Social Security?

Are 401k Withdrawals Considered Income for Social Security? No. Social Security only considers “earned income," such as a salary or wages from a job or self-employment.

Which states do not tax 401k distributions?

A lack of tax

Nine of those states that don't tax retirement plan income simply because distributions from retirement plans are considered income, and these nine states have no state income taxes at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.

Does money in the bank affect Social Security?

Social Security Benefits

You will receive the money you pay into the program if you meet the minimum age and immigration status requirements. For this reason, having a savings account does not influence your ability to access Social Security.

How many years do you have to work to get maximum Social Security?

Qualifying for Social Security in the first place requires 40 work credits or approximately 10 years of work. 2 To be eligible to receive the maximum benefit, you need to earn Social Security's maximum taxable income for 35 years.

Is Social Security based on the last 5 years of work?

A: Your Social Security payment is based on your best 35 years of work. And, whether we like it or not, if you don't have 35 years of work, the Social Security Administration (SSA) still uses 35 years and posts zeros for the missing years, says Andy Landis, author of Social Security: The Inside Story, 2016 Edition.

What is a good monthly retirement income?

But if you can supplement your retirement income with other savings or sources of income, then $6,000 a month could be a good starting point for a comfortable retirement.

How much does the average retired person live on per month?

Average Retirement Expenses by Category. According to the Bureau of Labor Statistics, an American household headed by someone aged 65 and older spent an average of $48,791 per year, or $4,065.95 per month, between 2016 and 2020.

What is a good retirement income?

Most experts say your retirement income should be about 80% of your final pre-retirement annual income. 1 That means if you make $100,000 annually at retirement, you need at least $80,000 per year to have a comfortable lifestyle after leaving the workforce.

How can I retire early without penalty?

One option for taking early distributions from a traditional IRA or for taking non-qualified Roth IRA distributions is to use the IRS's section 72(t)(2) rule, which allows retirement account holders to avoid paying the 10 percent penalty by taking a series of substantially equal periodic payments (SEPPs) for five years ...

At what age can you retire?

The full retirement age is 66 if you were born from 1943 to 1954. The full retirement age increases gradually if you were born from 1955 to 1960, until it reaches 67. For anyone born 1960 or later, full retirement benefits are payable at age 67.

What is the best way to withdraw money from 401k after retirement?

Options for Withdrawing Money from a 401(k) When You Retire
  1. Lump-sum distribution. ...
  2. Periodic Distributions from 401(k) ...
  3. Buy an Annuity. ...
  4. Roll Money into an IRA. ...
  5. The 4% withdrawal rule. ...
  6. Fixed-dollar withdrawals. ...
  7. Fixed percentage withdrawals.

Can I use my 401k to buy a house?

Can You Use a 401(k) to Buy a House? The short answer is yes, since it is your money. While there are no restrictions against using the funds in your account for anything you want, withdrawing funds from a 401(k) before the age of 59 1/2 will incur a 10% early withdrawal penalty, as well as taxes.