Retirement FAQ

I am considering retiring early at age 55.  I have two 401(k) plans, one with my current employer and one with a former employer.  My understanding is that there is a provision that now allows people age 55 or older to withdraw funds from a 401(k) without incurring the 10% penalty.  What should I know about that?

Answer

You are correct.  President George Bush signed into law a new provision known as the “Rule of 55” which allows for early withdrawals from a 401(k) when you separate from service in the same calendar year as your 55th birthday (or older).  However, there are two very important caveats:

  1. The rule only applies to your current employer sponsored plan. It won’t apply to the 401(k) plan with your former employer because you separated from service before age 55.  The solution is to roll your old 401(k) into your current plan if it is allowed by your employer.
  2. The rule also won’t apply if, at any time before age 59 ½, you roll your 401(k) plan into an IRA. The Rule of 55 does not apply to individual retirement plans, only employer-sponsored plans.

If you happen to be a first responder, like a police officer, fire fighter, or medic, you are eligible to take penalty-free early withdrawals as early as age 50 if you have at least 20 years of service.

Alternatively, anyone is eligible to take early withdrawals from their 401(k) at any age as long as they adhere to the Series of Substantially Equal Periodic Payments plan (SEPP).  The SEPP plan can be somewhat convoluted, but, essentially, it allows for early withdrawals beginning at any age as long as the withdrawals made up through the age of 59 ½ are substantially equal in size.

If you are contemplating taking an early withdrawal from a retirement plan you should consult with a financial professional as mistakes could be very costly.

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