Rule of 55

An IRS exception that allows penalty-free withdrawals from a current employer’s 401(k) or 403(b) after leaving the job in or after the year you turn 55.

What it means

Withdrawals from retirement accounts before 59½ usually carry a 10% penalty. The rule of 55 waives it for withdrawals from the plan of the employer someone leaves in or after the calendar year they turn 55, whether they quit, are laid off or retire. Certain public safety workers in governmental plans can use it starting at 50.

It applies only to that employer’s plan, not to IRAs or plans from earlier jobs, unless that money was rolled into the current plan before leaving. Regular income tax still applies, and plans differ in how they allow withdrawals, with some requiring a single lump sum.

Example

Suppose someone leaves their job at 56 with $400,000 in that employer’s 401(k) and withdraws $40,000. They owe income tax but avoid a $4,000 penalty; the same withdrawal from an IRA would generally be penalized.

How it’s used

Retiring or being laid off in your mid-50s
Bridging income until other savings or Social Security
Planning which accounts to tap first

Strengths and weaknesses

Strengths

Avoids the 10% early withdrawal penalty
No fixed payment schedule required
Works whether leaving is voluntary or not

Weaknesses

Limited to the most recent employer’s plan
Lost if the money is rolled into an IRA
Withdrawals are still taxable
Plan rules may limit withdrawal options

Good to know

Rolling old 401(k)s into the current plan before leaving can bring more money under this rule.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.