The theme this week on the Retirement Quick Tips Podcast is: penalty-free early withdrawals for retirement. 

Today, I’m talking about how you might be able to use the Rule of 55 if you retire in your 50s and you need to start taking withdrawals from you tax-deferred accounts prior to age 59 ½. Yesterday, I talked about rule 72(t) for early withdrawals, but the inflexibility and room for error make that a pretty unpalatable solution.

Another option if you’re in this situation is called the Rule of 55. The catch is that it only works for certain workplace retirement plans, like a 401k or 403b, not with a Traditional IRA. 

The Rule of 55 is an IRS regulation that allows those 55 and older to withdraw funds from their 401(k) or 403(b) without a tax penalty.

I had this happen recently with a client who retired after age 55. Most of their assets are in 401k accounts, rather than taxable accounts, so it was something that we explored after my client retired. Similar to the rule of 72(t), it has certain restrictions and you’ll want to make sure you adhere to the rules, but it’s so much more flexible and a lot less room for error. 

Basically, if you retire after age 55, you would leave behind the money you need for withdrawals in your 401k…let’s say it’s $30,000/year that you need for portfolio withdrawals. You would leave enough in the account for portfolio withdrawals. You could leave everything in your 401k, but if you rollover the remaining balance to an IRA, it’s important that you leave enough in the 401k to cover your withdrawals until age 59 ½. 

Your 401k may or may not allow this option, so you’ll want to check with your HR/benefits dept. But if you can utilize this rule, it’s more flexible and easier to administer than the 72(t) withdrawal rule, so it’s worthy of consideration. Once you roll all of your 401k into the IRA, this option is no longer available, so it’s important to find out if this is allowed in the plan before you initiate a rollover with your old employer.

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast. 

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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance