For many Americans, the residual of their 401(k) business relationship is i of the biggest fiscal assets they own — but the money in these accounts isn't always bachelor since there are restrictions on when it tin be accessed.

401(thousand) plans are meant to help you relieve for retirement, so if you take 401(grand) withdrawals before age 59 1/2, you'll generally owe a 10% early withdrawal penalty on top of ordinary income taxes.

Withal, there are limited exceptions. For instance, if you lot incur unreimbursed medical expenses that exceed 10% of your adjusted gross income, yous can withdraw coin from a 401(grand) penalisation-gratuitous to pay them. Similarly, you can take a penalty-free distribution if yous're a military reservist chosen to active duty.

Because the exceptions are narrow, about people must exit their coin invested until 59 one/2 to avoid incurring substantial taxes. All the same, there is one big exception that could employ if you're an older American who needs earlier access to your 401(k) funds. It'south called the "dominion of 55," and here's how it could work for you.

What is the rule of 55?

The rule of 55 is an IRS regulation that allows sure older Americans to withdraw money from their 401(k)due south without incurring the customary 10% penalty for early withdrawals made before age 59 1/2. The dominion of 55 applies to you if:

  • You leave your job in the calendar year that you lot will plow 55 or later (or the yr y'all will plough 50 if y'all are a public safety worker such equally a police officer or air traffic controller). You can exit for whatsoever reason, including because you were fired, you were laid off, or you quit.
  • You are withdrawing fundsonly from a 401(yard) business relationship offered by your nearly contempo employer. Yous cannot withdraw money penalty-free from accounts with other past employers, nor can yous brand penalty-free withdrawals from an IRA, even if y'all rolled over your 401(k) into one upon leaving your most contempo job.

I common misconception is that y'all tin leave your job earlier the calendar yr y'all turn 55 and the rule will still employ to you. This is not the case. If you are turning 55 in 2022 and left your job on Dec. 31, 2021, the rule does not utilize to you.

How to make the all-time use of the rule of 55

The restrictions of the rule of 55 make it vital to use smart retirement planning techniques. Showtime and foremost, you need to time your early retirement so you don't leave your job before the year in which you lot'll plough 55.

Second, if you lot want to maximize the amount of money you tin withdraw without penalties, you lot should take advantage of rollover options to move every bit much money as you tin can into your current employer's 401(g) before leaving your task. For example:

  • Many companies permit y'all to curl over 401(k)s from previous employers into your new employer's account.
  • Many as well enable you to move money from an IRA into your workplace 401(g) if the money got into the IRA when you rolled over a one-time workplace 401(k).

Whatever money in your electric current employer's 401(1000) account when you leave your job volition authorize for the dominion of 55, then using rollovers to put as much money into that account every bit possible provides you with the most flexibility. If you don't roll the money from old 401(g)s or rollover IRAs into your electric current 401(k) before leaving, you won't have the option to withdraw without penalty until age 59 1/two.

Finally, remember not to coil over your eligible 401(k) account into an IRA after quitting at age 55 or older. Doing so will cause you to lose the exemption and subject you to penalties for withdrawals until you hit 59 i/2.

Having admission to money is vital for retirees, especially if you terminate up having to retire early on or unexpectedly. Knowing the rules virtually getting access to your 401(k) at 55 or older can be a lifesaver for your finances.