Penalty Free Retirement Withdrawals Prior to Age 59.5? Let’s talk about “Rule 55″

It has been well documented that the earliest age to begin taking withdrawals from retirement accounts is age 59 ½.  This is the age you are now eligible to withdraw money from your IRA, 401(k), 403(b) or other qualified plans without incurring an early withdrawal penalty. Note: You may still have to pay taxes on the distribution (unless it is a Roth).

However, there is a little known loophole in the IRS code called “Rule 55”—also known as the “Age 55 Rule” — that allows you to make penalty-free withdrawals from your 401(k) and 403(b) accounts beginning at age 55. This rule could be helpful for early retirees. Let’s look at the details behind Rule 55:

Rule 55 applies to any employee who retires, quits a job or is terminated from a job during the calendar year in which he or she turns age 55.

If you have old 401(k)/403(b) plans still remaining with former employers—and you left those jobs prior to age 55–then you will have to wait until age 59 ½ to access the funds in those accounts penalty-free. However, if you rolled an old 401(k) account into your current employer’s plan, and separated from service at age 55, you would be permitted to withdraw the money from the plan penalty-free.

Rule 55 applies only to funds in your 401(k) or 403(b) accounts. IRAs operate under different rules which only allow for penalty free withdrawals beginning at age 59 ½.  Therefore, if you roll your current 401(k) or old 401(k) into a personal IRA, you will lose this exemption.

Keep in mind that there are many other circumstances in which you can make penalty-free withdrawals from your retirement accounts at any time, regardless of age.  Below is a chart that breaks down those circumstances:

 

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Conclusion

There are many different circumstances and rules governing withdrawals from retirement accounts. No two situations are the same. That’s why it’s important to understand the framework of these rules and whether or not they pertain to your particular situation. If you have questions about when, how or if these rules may impact your financial planning decisions, please do not hesitate to reach out to us.

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About Patrick Melvin Jr.

Patrick D. Melvin Jr., is a Wealth Manager at Independence Advisors, LLC. Pat models client’s financial plans and works with the firm’s clients on financial planning areas such as retirement planning, investment planning and estate planning. CLICK HERE TO ASK PAT.

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