Earliest age you can withdraw from 401k without penalty

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Retirement accounts exist to help you invest to build wealth for your golden years. That’s why Internal Revenue Service (IRS) rules make it challenging to withdraw money from tax-advantaged retirement accounts early—policymakers want to ensure account holders keep money in the accounts to support themselves over the long term.

But not everyone can wait until they’re 59 ½ to start distributions from their retirement accounts. Luckily, tax-advantaged retirement plans offer a lesser known option for penalty-free early withdrawals: the rule of 55.

What Is the Rule of 55?

The rule of 55 is an IRS guideline that allows you to avoid paying the 10% early withdrawal penalty on 401(k) and 403(b) retirement accounts if you leave your job during or after the calendar year you turn 55.

According to Dara Luber, senior retirement product manager at TD Ameritrade, the rule applies regardless of the terms of your separation, so you can take advantage of it whether you’re laid off or decide to retire early.

For some public service employees, it’s even possible to apply the rule in the calendar year you turn 50, says Luber. Firefighters, police officers and emergency medical technicians (EMTs) who have a 403(b) might have the option to begin taking withdrawals five years earlier, depending on their situation.

“The rules are very specific, so you need to make sure you’re following them before you begin taking money out of your retirement account,” says Luber.

Get the process wrong, and you’ll end up paying the same 10% early withdrawal penalty as everyone else who withdraws money from a tax-advantaged retirement fund before they turn 59 ½. That means the IRS will charge you 10% of what you withdraw, plus taxes on any money that hasn’t been taxed before, like Roth account earnings.

How to Use the Rule of 55 to Fund Your Early Retirement

Many people who retire early use the rule of 55 to avoid the 401(k) early withdrawal penalty. Follow these steps to use the rule of 55 to help fund your early retirement:

You Must Leave Your Job the Year You Turn 55—or Later

If you retire or are laid off in the calendar year you turn 55 or later—or the year you turn 50 if you’re a public service employee—you can withdraw funds from your current 403(b) or 401(k) plan without paying the early withdrawal 403(b) or 401(k) penalty.

You can’t retire at age 53 and then start taking 401(k) withdrawals at age 55, for instance. “It only works if you’ve left your job in the year you turn 55 or later,” says Luber. “You can’t start taking that money out if you’ve already retired early.”

Note: Not all employers may support these early withdrawals—and even if they do, they may require you withdraw all of your money in one lump sum. Check with your retirement plan provider to figure out your plan’s policies.

You Can Only Withdraw from Your Current 401(k)

Penalty-free early withdrawals are limited to funds held in your most recent company’s 401(k) or 403(b) under the rule of 55.

“Even if you’re 55 or older, you can’t reach back to old 401(k)s and use that money,” says Luber. “Additionally, this rule doesn’t apply to individual retirement accounts (IRAs), so you need to leave your IRA alone if you want to avoid the penalty.”

If you’re actively planning how to retire early, Roger Whitney, certified financial planner (CFP) and host of the Retirement Answer Man Show, suggests rolling retirement funds from old jobs and other retirement accounts into your current 401(k) before you leave. This way, you can get access to they money with the rule of 55.

You Can Still Withdraw Early, Even If You Get Another Job

You aren’t locked in to early retirement if you choose to take early withdrawals at age 55. If you decide to return to part-time or even full-time work, you can still keep taking withdrawals without paying the 401(k) penalty—just as long as they only come from the retirement account you began withdrawing from.

Other Ways to Avoid the 401(k) Withdrawal Penalty

The rule of 55 isn’t the only way to avoid the 401(k) early withdrawal penalty. Other circumstances that allow you to avoid that additional 10% penalty include:

•  Total and permanent disability.

•  Medical expenses that exceed 7.5% of your adjusted gross income.

•  Withdrawals made because of an IRS levy plan.

•  Qualified disaster distributions.

•  Status as active duty and qualified reservist.

Additionally, Whitney points out, it’s possible to set up a situation where you take substantially equal periodic payments. This is sometimes called the 72t rule.

“With 72t, you use IRS tables to decide how much to take each year if you’re under age 59 ½,” he says. “You won’t be stuck with the penalty, but you won’t have flexibility. You have to commit to taking those withdrawals for at least five years or until you’re 59 ½, whichever is greater.”

With the rule of 55, you have more flexibility, Whitney says. As long as you meet the requirements, you can take as much or as little as you want from the 401(k) without committing to a set schedule.

Should You Use the Rule of 55?

You might consider using the rule of 55 if any of the following circumstances apply:

•  You’d like to retire early. With the rule of 55, you’ll be able to get the money you need to cover expenses, and if you decide to get a job later, you can still keep taking withdrawals from the qualifying 401(k) or 403(b) as necessary. Remember that even if you don’t end up paying the extra 10% 401(k) penalty, you still have to pay regular taxes on any money you withdraw that hasn’t been taxed before.

•  You’d like to minimize or eliminate RMDs. Once you turn 72, you’ll be required to take required minimum distributions (RMDs) from most qualified retirement accounts. Depending on your situation, then, it might make sense to use the rule of 55 to reduce that amount that’s considered in your RMD calculations. “Every dollar you don’t take out could grow to a huge RMD situation down the road where you have no control over tax rates,” Whitney says. “Talk to a retirement specialist to figure out your draw down.

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Depending on your tax situation, both Luber and Whitney say it also might make sense to take a portion of your 401(k) and do a Roth IRA conversion. However, it’s important to review the tax consequences of a move like this with a tax professional.

Keep in mind that any money converted to an IRA would make the funds ineligible for the rule of 55 and prevent penalty-free access for five years under Roth conversion rules. That said, moving funds into a Roth IRA allows you to benefit from years of valuable tax-free investment growth.

“Before you leave your job, make sure you look at all your accounts and assets and review the potential tax consequences,” Whitney says. “Then decide what is likely to work best for you.”

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