Understanding the 401(k) Age 55 Rule
Understanding the 401(k) Age 55 Rule
Maybe you just turned 55 and you really want to retire early. Or maybe you've hit upon a life circumstance that demands a little or a lot of extra cash sooner rather than later. In either case, you want to withdraw money from your 401(k) plan. Can you do that at or after age 55? It depends on whether you still work for the company that maintains your plan and how old you were when you left them if you don't.
The 10% Penalty Tax
Withdrawals made from a 401(k) before age 59.5 are often subject to a 10% penalty tax unless special circumstances exist. The 10% applies to the amount of the distribution. You'll also pay income tax on the distribution itself.
Rollover contributions to another plan aren't subject to the penalty.
If You're Still Working for the Company
Most 401(k) plans don't allow "regular withdrawals" at age 55 while you're still working for the company. A regular withdrawal is defined as one that's not subject to penalties and doesn't require you to qualify based on special circumstances.
You might be able to take a 401(k) loan or qualify for a hardship withdrawal rather than take a regular withdrawal if your 401(k) plan allows these options. Not all 401(k) plans are required to offer loans or hardship withdrawals, however.
You can check with your plan administrator to see if they have a special provision that allows for something called an "in-service distribution."
If You've Moved On
The rules are a different if you want to take money out of an old 401(k) plan from an employer for whom you no longer work. It doesn't matter why you left employment—whether you were terminated, laid off, or quit—but you can't be working there any longer.
You can take a withdrawal from your 401(k) plan in this case either during or after the year in which you turn 55. This is often referred to as the "Rule of 55."
The withdrawal is considered taxable income, and your ex-employer must withhold 20% from the withdrawal for income tax, but it won't be subject to the 10% early withdrawal penalty that applies before age 59.5. It's possible, too, that you could get a refund for a portion or all of the 20% if your withholding or estimated tax payments during the year exceed your ultimate tax liability—what you owe the IRS.
This Rule of 55 applies five years earlier, at age 50, for qualified public safety employees.
This early access provision doesn't apply if you rolled your old 401(k) plan to an IRA, and employers aren't legally obligated to allow these withdrawals.
If You Left Your Previous Employer Before Age 55
The special age 55 withdrawal provision doesn't apply if you leave your previous employer before you reach age 55, or age 50 for public safety employees, even if you're over age 55 now. Any withdrawals you take are subject to the penalty tax unless you can roll your 401(k) plan to an IRA and qualify for an exception to the penalty.
The date you leave employment with the company is the pivotal factor, not the date at which you begin taking distributions. That date must meet the age-55 rules.
Your 401(k) money is protected from creditors, and you'll void this protection by cashing in your 401(k) plan early.
It can make sense in some cases to leave the money in your 401(k) plan until you reach age 59.5 if you retire early before age 60. This allows you to take withdrawals if you need to.
It might make sense to wait until the year you reach age 55 if you can retire at age 54. You'll have more access to your 401(k) money and can take withdrawals that aren't subject to an early withdrawal penalty tax.
These rules don't apply if you inherit a 401(k) plan. The rules in this case will depend on whether you were a spouse or a non-spouse, and the age at death of the 401(k) owner.
Tax laws change periodically. You should always consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.
IRS. "Topic No. 558 Additional Tax on Early Distributions From Retirement Plans Other Than IRAs." Accessed Feb. 6, 2020.
IRS: "Retirement Topics - Exceptions to Tax on Early Distributions." Accessed Feb. 6, 2020.