What the Rule of 55 Means for Your Retirement Distributions

What the Rule of 55 Means for Your Retirement Distributions
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(This article originally appeared in the June 2023 issue of Military Officer, a magazine available to all MOAA Premium and Life members. Learn more about the magazine here; learn more about joining MOAA here.)


Generally, you must be 59½ years old before you can start withdrawing money from your retirement accounts penalty-free. This might make retirement planning challenging for those who wish to retire earlier.


Fortunately, an IRS provision makes it possible for those who want, or are forced, to leave their job earlier to take distributions from their retirement savings: the Rule of 55.


What Is It?

The Rule of 55 allows workers who leave their job during or after the year they turn 55 to avoid paying the 10% early withdrawal penalty on their retirement account distributions.


It doesn’t matter why you are leaving, but you must be at least 55 years old in the calendar year you are leaving your job. Not every retirement plan offers early withdrawals, so you will have to ask your employer whether your retirement plan supports this rule.


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Important Details 

Consider the following before invoking the Rule of 55:

  • The rule only applies to employer retirement plans such as 401(k) plans, equivalent 403 and 408 plans, and the Thrift Savings Plan. It does not apply to individual retirement accounts.

  • It only applies to your current retirement plan. If you have retirement plans at previous employers, you can’t withdraw from them under this rule.

  • You still might owe income tax. Even though the Rule of 55 exempts you from paying the 10% early withdrawal penalty, the money you take out counts as income that you will need to report on your taxes.

  • It includes mandatory withholding. The IRS will require your employer to withhold taxes from your payout. If that turns out to be more than you actually owe, you will have to wait until you file taxes to get a refund.

  • You’re allowed to go back to work full- or part-time at another company. Once you’ve started withdrawing from your retirement plan, you can go back to work and can continue to withdraw money (but only from the same plan you’ve tapped into).


Other Options 

You could take out a loan from your current retirement plan (if rules allow it) and pay it back over five years. But if you leave your employer, the loan would become payable, and any portion you are unable to repay would become a taxable distribution. You would also owe the 10% early withdrawal penalty if you are under age 59½.


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If you are under age 59½ and want to avoid the early withdrawal penalty, another option is IRS rule 72(t), also called Substantially Equal Periodic
Payments (SEPP). This allows workers to take annual payments from their retirement plan for five consecutive years or until age 59 ½, whichever comes later.


Once you commit to a SEPP program, it’s permanent, and it also prevents you from making future contributions to that account.


It’s always best to consult with a financial professional as well as your retirement plan administrator before making a final decision.


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About the Author

Lila Quintiliani, ChFC®, AFC®
Lila Quintiliani, ChFC®, AFC®

Quintiliani is MOAA's Program Director, Financial and Benefits Education/Counseling. She is a former Army Military Intelligence Officer as well as the spouse of an active-duty servicemember, and worked for over a decade at military installations as a personal financial counselor.