If early retirement is on the table for you, then you should know this…
The standard guideline for withdrawing from retirement accounts is to wait until age 59.5. This is the age where withdrawals from retirement accounts are penalty-free. There is however an exception to that rule that some people qualify for called the rule of 55 which is specific to employer sponsored plans. (Such as a 401(k) or a 403(b)).
What Is the Rule of 55?
If you leave your job in or after the year you turn 55 (or 50 for public safety workers), you can withdraw funds from your current employer retirement plan without the usual 10% early withdrawal penalty. You’ll still owe income tax, but that extra penalty disappears.
However, there are a few important caveats:
✔️ This only applies to your most recent employer’s plan—not old 401(k)s or IRAs.
✔️ Your employer must allow early withdrawals (some require lump sums, which could bump you into a higher tax bracket).
✔️ You must leave your job first (Returning to work later is still an option though.)
How to Use It Strategically:
If you’re planning to retire early, tapping your 401(k) too soon could mean paying more taxes than necessary. It could make sense to wait until a new tax year if you’ve already earned a high salary that year. Instead, consider bridging the gap with savings or after-tax investments before withdrawing.
Other Ways to Avoid the 10% Penalty:
The Rule of 55 isn’t the only way to access retirement funds early. You can also withdraw penalty-free if:
- You have significant medical expenses (Over 7.5% of your adjusted gross income.)
- You become permanently disabled.
- You take substantially equal periodic payments (SEPP), based on life expectancy.
Bottom Line:
The Rule of 55 can be a valuable tool for early retirees, but just because you can withdraw doesn’t mean you should. If you don’t need the money immediately, keeping it invested or rolling it into an IRA could be the smarter long-term moves.
As always, it is usually best to plan ahead of time. Feel free to reach out to us if you have any questions.
Check out our latest two YouTube videos. One is about how to not run out of money in retirement. The other is about retiring happy. Let me know what you think.
Video: A Simple Way To Avoid This Major Retirement Income Mistake
Video (This video goes live February 22): What You Need To Know To Retire Happy
On the lighter side, Elliott is coming home Friday for a day or so. We cant wait to see him.
