For many Americans, the balance of their 401(k) account is 1 of the biggest fiscal avails they own — simply the coin in these accounts isn't e'er available since there are restrictions on when it tin can be accessed.

401(1000) plans are meant to help you save for retirement, so if you accept 401(grand) withdrawals before age 59 1/ii, you'll mostly owe a ten% early withdrawal penalty on summit of ordinary income taxes.

Yet, there are limited exceptions. For instance, if you incur unreimbursed medical expenses that exceed x% of your adjusted gross income, you can withdraw coin from a 401(m) penalty-complimentary to pay them. Similarly, y'all can have a penalisation-free distribution if yous're a armed forces reservist called to active duty.

Because the exceptions are narrow, almost people must get out their money invested until 59 1/two to avoid incurring substantial taxes. However, there is i large exception that could utilize if you're an older American who needs earlier access to your 401(grand) funds. It's called the "rule of 55," and here's how it could work for you lot.

What is the dominion of 55?

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

  • Y'all exit your job in the calendar year that you will plough 55 or later (or the year you will turn l if yous are a public safety worker such every bit a police force officer or air traffic controller). You can get out for any reason, including because you were fired, yous were laid off, or y'all quit.
  • You are withdrawing fundsmerely from a 401(thousand) account offered past your most recent employer. You cannot withdraw coin penalisation-free from accounts with other by employers, nor tin you make penalty-free withdrawals from an IRA, even if you rolled over your 401(g) into one upon leaving your most recent task.

One mutual misconception is that you tin leave your chore before the calendar year yous turn 55 and the dominion will notwithstanding apply 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 apply to you.

How to make the best use of the rule of 55

The restrictions of the rule of 55 make information technology vital to employ smart retirement planning techniques. First and foremost, you demand to fourth dimension your early on retirement so you don't get out your job before the twelvemonth in which yous'll plow 55.

Second, if you desire to maximize the amount of money you lot can withdraw without penalties, yous should accept advantage of rollover options to move as much money as yous can into your current employer's 401(k) before leaving your job. For example:

  • Many companies allow yous to roll over 401(k)s from previous employers into your new employer'south account.
  • Many also enable y'all to move money from an IRA into your workplace 401(grand) if the money got into the IRA when you rolled over a one-time workplace 401(k).

Whatsoever money in your current employer's 401(k) business relationship when yous leave your job will qualify for the rule of 55, then using rollovers to put equally much coin into that account every bit possible provides you with the most flexibility. If yous don't roll the coin from old 401(k)s or rollover IRAs into your current 401(k) before leaving, yous won't take the option to withdraw without penalty until historic period 59 1/2.

Finally, call up not to roll over your eligible 401(1000) account into an IRA after quitting at historic period 55 or older. Doing so will cause you to lose the exemption and subject yous to penalties for withdrawals until you hitting 59 i/two.

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