June 23, 2023

Rule of 55 - Understanding an Earlier Retirement Strategy

Once you reach age 55, certain employer-sponsored plans allow for penalty-free withdrawals prior to age 59 ½.

Rule of 55 withdrawals allow you to withdraw funds from 401k and 403b plans prior to age 59 ½ (the traditional age requirement) without paying the 10% penalty assessed on early withdrawals.

The first factor to note is that the Rule of 55 does not apply to all 401k and 403b plans, and it does not apply to either Traditional or Roth IRAs. Check with your employer to determine if your plan is eligible for this provision. Additionally, you must leave your position with the company (voluntarily or involuntarily) during or after the year you turn 55.

The final caveat to this is that funds must remain inside the employer plan, meaning that if you roll the 401k (or 403b) into an IRA, you lose the Rule of 55 provision and must now wait until 59 ½ to begin taking distributions penalty-free.

Rule of 55 benefits have several provisions that must be met prior to being taken advantage of. However, they give an amount of flexibility to those who are hoping to retire early and will need to utilize funds saved for retirement prior to some supplemental income sources kicking in. For example, someone might want to retire before 62, but will need an income source before beginning Social Security payments. If the plan allows and conditions are met, they could make withdrawals from their plan and defer Social Security, allowing their monthly benefit to increase thanks to a later beginning date (for more information on the timing of Social Security, take a look at our article on Social Security).  A comprehensive financial plan can help provide clarity to these decisions and have a meaningful impact on someone’s long-term financial outlook.

Download the free retirement timeline checklist

A short guide to understanding what happens at different ages throughout retirement - for example:

  • Age 50 - Catch-Up Contributions for 401(k)s, employer-sponsored plans, and IRAs begin. $7,500 for 401k ($30,500 total), $1,000 for IRAs ($8,000 total)
  • Age 55 -Certain employer-sponsored retirement plans allow distributions without penalty beginning at age 55. HSA contributions are now eligible for a $1,000/year additional catch up for those over age 55.
  • And more
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