Fidelity does not guarantee accuracy of results or suitability of information provided. If you retire when you are 55 or over, you can withdraw from the 401k plan and not owe the 10% penalty. Her 401k plan with her current employer will be about $50-60k by the end of the year. The Fidelity saving guidelines provide rules of thumb or simple guidelines that you can use to discover more about retirement. “Retiring earlier than 62 means no Social Security income,” Lowell says. But you must agree to receive equal payments for at least five years or until age 59 1/2 (whichever is later). Meet with your financial advisor to discuss the pros and cons of retiring early. Distributions are taken as the result of an IRS levy. And by taking advantage of the rule of 55, you can send more of those withdrawals to your own pocket and less to the IRS. Of course, the IRS never makes anything simple. “If you were employed for most of the year and had a relatively high income, then it makes sense to not withdraw money under the Rule of 55 in that calendar year, since it will add to your total income for the year and possibly result in you moving to a higher marginal tax bracket,” Lowell says. The rule means you can avoid the 10% early withdrawal penalty on distributions from your 401k (not IRA) if you are 55 or older and separate from service AFTER turning 55 (meaning you quit/lose your job with that employer).. If you leave your job at age 55 or older and want to access your 401(k) funds, the Rule of 55 allows you to do so without penalty. 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% penalty for … The 401K law was written by lobbyists for the investment industry. The rule of 55 applies only to your current workplace retirement plan and doesn't spare you from paying regular income tax on the withdrawal. ANSWER: Known as the “age 55 rule”, this rule should be considered if you need to take a distribution from a former employer 401k retirement plan. The longer your money is invested, the more time you give your investments to grow tax-deferred and for compound interest to work in your favor. Or will you be able to draw from taxable investment accounts, savings accounts, CDs or other assets to cover your expenses in early retirement? How Much Do I Need to Save for Retirement? So if you retired at age 54, you wouldn't be eligible for the rule of 55, even after your 55th birthday. Veuer’s Sean Dowling has more. Here's how the 401k 55 rule works. It's important to note that the Rule of 55 does not apply to IRAs. Employer-sponsored, tax-deferred retirement plans like 401(k)s and 403(b)s have rules about when you can access your funds. If you participate in a company retirement plan, such as a 401(k), there's a way you can take a distribution and get out of paying the 10% early distribution penalty if you're under age 59 ½ at the time of the withdrawal. Other hardship distributions apply to home expenses, medical expenses, and other dire financial needs. Show full articles without "Continue Reading" button for {0} hours. Or I was thinking of rolling over my existing 401k to a ROTH IRA so that I can choose more specific mutual funds to invest in, and tap the 401k of my new employer when I retire at age 55, so I’ll have two investment paths for retirement. (The employer is required to withhold 20% from any Rule of 55 withdrawal for federal income tax, which is non-negotiable.) But you may ultimately decide that an early 401(k) withdrawal is the right move for your situation. Fidelity's rule of thumb is to save enough to replace at least 45% of your preretirement income, 1 after accounting for Social Security. 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