Your plans for retirement are right on track. In fact, you’ve done so well that you could actually retire early. The only problem is, most of your money is locked up in retirement accounts and you don’t want to pay that pesky 10% IRS penalty for taking distributions before you’re 59 ½. Well, take heart. You may be able to get to that money early without penalty using a little-known IRS provision called the Rule of 55.
What is the Rule of 55
The rule of 55 is specifically for people who lose their job or retire at age 55 or older. And because most people in those situations need to access their funds, the IRS doesn’t penalize you for early withdrawals, even though you will still have to pay income taxes on the distributions.
The rule applies to 401(k) accounts as well as 403(a) and 403(b)s. You may be able to use the Rule of 55 with any qualified account. You can find out if yours qualifies by checking the Summary Plan Description or asking the HR department. Here are the rules.
You must leave when you’re 55 or older
You have to leave your job, whether retiring, laid off or fired, in the calendar year you turn 55 or later. For example:
- You can’t leave your job when you’re 53 and then begin taking penalty-free distributions when you turn 55.
- However, if you get laid off, fired or quit your job when you are 57, you can start taking penalty-free withdrawals from the 401(k) account you were contributing to at the time you left your employer.
You can only take distributions from one 401(k) plan
You meet the Rule of 55 age requirement for penalty-free distributions from a 401(k), but you have 401(k) accounts at previous employers. Which do you use?
The Rule of 55 only allows penalty-free distributions from the account you were contributing to at the time you left your last employer. Penalty-free distributions from 401(k) accounts at previous employers cannot happen until you are 59 ½. You can roll those previous employer accounts into an IRA, but the 59 ½ rule still applies.
You can’t move the money
If you leave your job for any reason and want to use the Rule of 55 to access your 401(k), the money has to stay in the employer plan as long as you’re taking the penalty-free withdrawals or until you turn 59 ½.
The rule of 55 doesn’t apply to individual retirement accounts (IRAs) so, if you roll the 401(k) you’ve been taking distributions from into an IRA before you’re 59 ½ and continuing taking distributions, you’ll be charged an early withdrawal penalty on the IRA withdrawals. At 59 ½, IRA withdrawals are penalty-free as well.
Maximizing the amount available for Rule of 55 withdrawals
If you want to maximize the amount of money you can withdraw without penalty, move old 401(k)s at previous employers into your current 401(k) before leaving your job.
Many employers allow you to roll old 401(k)s into your existing account. Many allow you to move money from an IRA into your current 401(k) account if the money in the IRA was rolled over from a former workplace 401(k).
Any money in your current employer’s 401(k) account when you leave your job will qualify for the rule of 55, so using rollovers to get as much money as possible into your current account gives you more flexibility.
You can withdraw the money even if you get another job
Future employment has no effect on Rule of 55 withdrawals you set up. Let’s say you left your job at age 55 and set up the penalty-free withdrawals from your 401(k) account. Then, in a year or so, you decide to get another job. You can continue distributions from your old plan as long as it was the 401(k) you were contributing to when you quit at age 55 and you haven’t rolled it over into another plan or IRA.
Public safety employees can access earlier
Public safety employees can access their qualified retirement money beginning in the calendar year they turn 50. Public safety employees are defined as police officers, firefighters, EMTs, and air traffic controllers.
Disclaimer
This information is presented for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy any investment products. None of the information herein constitutes an investment recommendation, investment advice or an investment outlook. The opinions and conclusions contained in this report are those of the individual expressing those opinions. This information is non-tailored, non-specific information presented without regard for individual investment preferences or risk parameters. Some investments are not suitable for all investors, all investments entail risk and there can be no assurance that any investment strategy will be successful. This information is based on sources believed to be reliable and Alhambra is not responsible for errors, inaccuracies, or omissions of information. For more information contact Alhambra Investment Partners at 1-888-777-0970 or email us at [email protected].
