If you’re thinking about retiring early, an Internal Revenue Service (IRS) provision could offer valuable flexibility. Known as the rule of 55, it lets you tap into your 401(k) without paying the usual 10% early withdrawal penalty — provided you leave your job at age 55 or later. 

Read on to learn how the IRS rule of 55 works, who qualifies, and when you can use it. You’ll also find key considerations for incorporating it into your retirement strategy. 

What is the rule of 55?

The rule of 55 is an IRS provision that allows individuals to withdraw funds from a 401(k) or 403(b) account penalty-free, as long as they leave their job in or after the calendar year they turn 55. You might leave either voluntarily or involuntarily through layoffs. 

Not all retirement plans permit this type of withdrawal, however, and failing to meet IRS rules could result in unexpected penalties or taxes. If you’re considering using the rule of 55, it’s essential to confirm your plan’s provisions first. 

Rule of 55: Retirement eligibility requirements

The rule of 55 only applies if you meet specific conditions, and it isn’t automatically applied. Before relying on this rule to help fund early retirement, ensure you understand the requirements:

• Eligibility begins in the calendar year you turn 55.
• It only applies to 401(k) or 403(b) plans associated with the employer you separate from in or after the year you turn 55. If you leave a job before that age and still have funds in that plan, those funds aren’t eligible under the rule.
• It doesn’t apply to IRAs. If you roll over your 401(k) into an IRA after leaving your job, you lose rule of 55 eligibility. Any early withdrawals from an IRA before age 59½ would be subject to the standard 10% penalty.

Rule of 55: Pros and Cons

Early retirement can be appealing, and the rule of 55 can make it more feasible for many people. But using it may come with tradeoffs, so it can be vital to be aware of these before committing.

Pros of using the rule of 55

Financial flexibility

Whether you’re facing an unexpected layoff, switching careers, or intentionally retiring early, the rule provides access to retirement funds when you need them most, without waiting several more years.

No penalties 

If you meet the eligibility requirements, you can withdraw 401(k) or 403(b) funds without paying the 10% penalty that typically applies before the age of 59½. 

Early access to funds

Social Security benefits generally don’t start until age 62. The rule of 55 can help cover living expenses in the interim without forcing you to dip into other investment accounts or take on debt. 

Cons of using the rule of 55

Tax liabilities

Even though you avoid the penalty, withdrawals are still taxed as ordinary income. Large distributions could push you into a higher tax bracket, reducing your net income.

Reduced long-term growth

Tapping into your retirement account early can disrupt the compounding growth you would otherwise enjoy by keeping that money invested. Even small withdrawals can impact your portfolio over time.

Risk of overspending

Having access to your 401(k) at 55 can be tempting. However, without a clear view of retirement expenses and a thoughtful spending plan, you could leave yourself short in later years and risk outliving your money. Treating this rule as a safety valve, not a blank check, is essential.

How to use the rule of 55 on 401(k)s

Eligibility for the rule doesn’t mean you have automatic access — you’ll need to follow the proper process. Before taking a distribution, confirm that your 401(k) or 403(b) provider allows withdrawals. Not all retirement plans are structured the same way, and some may have limitations or require specific paperwork. Once confirmed, you can typically request a withdrawal through your plan’s online portal or by contacting the provider directly. You’ll need to choose how much to withdraw and how you want to receive the funds. 

Secure reliable retirement income with Gainbridge

If you anticipate needing access to income before age 59½, or simply want to safeguard your financial future, it’s worth considering options that can provide long-term stability. 

Gainbridge offers annuity products designed to deliver guaranteed income in retirement, providing security and peace of mind. With an innovative platform and no hidden fees, Gainbridge can give you the tools to help build a reliable strategy. 

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To explore the wide range of options available, visit Gainbridge today. 

This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes.