Q&A What is the IRS’s “Rule of 55” for 401(k) plans?

Q & A:

QUESTION

Q: What is the IRS’s “Rule of 55” for 401(k) plans?

-Ready to Retire

ANSWER

Dear Ready:

Although you generally must wait until age 59½ to make withdrawals from your 401(k) without incurring a 10% early-withdrawal penalty, the IRS allows for a separation of service exception for certain workers. Also known as the “Rule of 55,” if you quit, were laid off, or otherwise terminated from your job during or after the year you turn 55, you can take withdrawals from your 401(k) or 403(b) penalty-free from the account associated with that job.   

That said, you are still required to pay income taxes on any withdrawals from your 401(k) or 403(b) in the year they were taken. Given this, you may want to consider setting aside some of the withdrawal to pay taxes. Moreover, IRAs are not eligible for this exception, so for those accounts, you must wait until age 59½ to take withdrawals without any penalty.

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