What Is the Rule of 55? Penalty-Free 401(k) Withdrawals After You Leave a Job

Short answer: The rule of 55 is an IRS exception that lets you take money out of your 401(k) or other qualified employer plan without the 10% additional tax on early distributions, as long as you separate from service with your employer during or after the calendar year you reach age 55. It doesn't apply to IRAs, and you still owe regular income tax on the taxable part of what you take out.

What Is the Rule of 55?

Normally, if you take money from a 401(k) before age 59½, the IRS says you may have to pay a 10% additional tax on the distribution. That tax is on top of regular income tax and equals 10% of the portion of the distribution that's included in your income.

The IRS lists a set of exceptions to that 10% tax. One of them covers distributions made to you after you separate from service with your employer, if the separation happens during or after the calendar year you reach age 55. People call this exception "the rule of 55." The name is a nickname; the IRS describes it as an exception for separation from service.

In plain terms: if you leave your job in the year you turn 55 or later, you may be able to start using that 401(k) right away without the extra 10%, instead of waiting until 59½.

How Does the Rule of 55 Work?

Three conditions come from the IRS's description of the exception:

1. You separate from service. The IRS wording is about separation from service with your employer. It doesn't list a required reason for leaving.
2. The timing is right. The separation must happen during or after the calendar year you reach age 55. The year counts, not your birthday. For example, someone who leaves a job in March and turns 55 in October of that same year meets the age test.
3. The money is in a qualified employer plan. The IRS table of exceptions marks this one as available for qualified plans, such as 401(k)s, and not for IRAs.

Your plan also has to make the payment. The IRS says distributions of elective deferrals generally can't be made until a triggering event, such as a severance from employment, reaching age 59½, death, disability or a financial hardship. Leaving your job is one of those triggers. Ask your plan administrator which payout options the plan offers before you leave.

Which Accounts Does the Rule of 55 Cover?

The IRS's exceptions table spells out which accounts each exception applies to. For the separation-from-service exception, it says:

Account type	Does the rule of 55 apply?
401(k) and other qualified plans	Yes
Traditional IRA	No
SEP, SIMPLE IRA and SARSEP	No

Two related points from the same IRS page:

• Governmental 457(b) plans work differently. The IRS says a distribution from a governmental 457(b) plan generally isn't subject to the 10% additional tax at all, except for amounts that were rolled into it from other plans or IRAs.
• Rolling into an IRA changes the rules. Once money moves from a 401(k) into an IRA, withdrawals from the IRA follow the IRA column of the table, where the separation-from-service exception isn't available. If you think you may need the money before 59½, check this before you roll over an old 401(k).

What Is the Rule of 55 for Public Safety Employees?

Public safety workers get an earlier age. IRS Topic 558 says a qualified public safety employee in a governmental plan can take distributions without the 10% additional tax after separating from service during or after the year they reach age 50, or after 25 years of service under the plan, whichever is earlier. Topic 558 has a similar rule for firefighters in certain plans.

The IRS exceptions page adds that this exception also includes specified federal law enforcement officers, corrections officers, customs and border protection officers, federal firefighters, private-sector firefighters and air traffic controllers. It applies to governmental defined benefit and defined contribution plans, including the Thrift Savings Plan (TSP).

If you think you qualify, confirm your status with your plan before you leave. The age 50 rule depends on both your job and the type of plan.

How Is a Rule of 55 Withdrawal Taxed?

The rule of 55 removes the 10% additional tax only. The rest of the tax rules still apply:

• Income tax. The taxable part of the withdrawal counts as income for the year you take it.
• 20% withholding. The IRS says any taxable distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll it over later. No tax is withheld if the money moves directly from the plan to another plan or IRA.
• Withholding may fall short. IRS Topic 558 notes that when a distribution is subject to the 10% additional tax, withholding may not be enough, and you may need to make estimated tax payments. Even when the exception applies, it's worth checking whether 20% covers your full tax bill for the year.
• Reporting. You report the 10% tax (when it applies) on Schedule 2 of Form 1040. If an exception applies but the distribution code box on your Form 1099-R doesn't show it, the IRS says to file Form 5329.

Because the withdrawal adds to your income for the year, a tax professional can help you decide how much to take and when.

What Are the Other Exceptions to the 10% Early Withdrawal Tax?

The rule of 55 is one of more than a dozen exceptions. Here are some of the ones listed on the IRS exceptions page, and whether each applies to a 401(k) or an IRA:

Exception	401(k) / qualified plan	IRA
Separation from service in or after the year you turn 55 (50 for public safety)	Yes	No
Substantially equal periodic payments (72(t))	Yes	Yes
Total and permanent disability	Yes	Yes
Death (paid to a beneficiary or estate)	Yes	Yes
Unreimbursed medical expenses above 7.5% of adjusted gross income	Yes	Yes
Birth or adoption, up to $5,000 per child	Yes	Yes
One emergency personal expense distribution a year, up to $1,000	Yes	Yes
Victim of domestic abuse, up to the lesser of $10,000 or 50% of the account	Yes	Yes
Terminal illness (with a physician's certification)	Yes	n/a
Paid to an alternate payee under a qualified domestic relations order (QDRO)	Yes	n/a
Health insurance premiums while unemployed	No	Yes
First-time home purchase, up to $10,000	No	Yes

Each exception has its own conditions, so read the IRS page for the details before relying on one.

Rule of 55 vs. 72(t) Payments: What's the Difference?

Both let you avoid the 10% additional tax before 59½, but they work differently:

• Rule of 55: depends on leaving your employer in or after the year you turn 55. It applies to qualified plans, not IRAs.
• 72(t) payments (substantially equal periodic payments): available from both qualified plans and IRAs, regardless of age. The IRS says that for a qualified plan, you must separate from service with the employer before the payments begin. The payments must continue for at least five years or until you reach age 59½, whichever is longer, except in the case of death or disability.

If you're still working and need cash, neither one helps with your current employer's plan. A 401(k) loan may be an option instead. Our guide to borrowing from your 401(k) explains the limits and the risks.

Should You Use the Rule of 55?

The rule of 55 answers a timing question: if you stop working in your mid-50s, it can let you use your 401(k) without the extra 10% while you wait for other income. Whether you should is a separate question, because money you take out early is no longer invested for later years.

Before you leave a job planning to rely on it, think through:

• How long the money needs to last. Our retirement savings calculator can show how withdrawals now change what's left later, and our guide to how much you should have in your 401(k) covers common benchmarks.
• Where the rest of your income will come from. Our guide to when to claim Social Security explains when benefits can start and the trade-offs of waiting.
• Whether to keep the money in the plan. If you may need it before 59½, leaving it in the 401(k) keeps the rule of 55 available. Rolling it into an IRA does not.

The Bottom Line

The rule of 55 lets you take money from your current employer's 401(k) or other qualified plan without the 10% additional tax if you separate from service during or after the calendar year you turn 55, or 50 for qualified public safety employees. It doesn't cover IRAs, it doesn't remove income tax, and a taxable distribution paid to you has 20% withheld. Check your plan's payout options, confirm the timing of your last day, and run the numbers before you decide how much to take.

Frequently asked questions

Does the rule of 55 apply to IRAs?

No. The IRS lists the separation-from-service exception as applying to qualified plans such as 401(k)s, but not to IRAs, SEPs, SIMPLE IRAs or SARSEPs. Money you roll from a 401(k) into an IRA follows the IRA rules.

Do I have to be 55 when I leave my job?

Not exactly. The IRS says the separation must happen during or after the calendar year you reach age 55. If you leave in the same calendar year you turn 55, the exception can apply even if your birthday comes after your last day.

Do I still pay income tax on a rule of 55 withdrawal?

Yes. The rule of 55 removes only the 10% additional tax. The taxable part of the withdrawal is still income for the year, and the IRS says any taxable distribution paid to you is subject to mandatory 20% withholding.

What is the rule of 55 for public safety employees?

IRS Topic 558 says qualified public safety employees in a governmental plan can take distributions without the 10% additional tax if they separate from service during or after the year they reach age 50 or complete 25 years of service under the plan, whichever is earlier. The IRS says this includes some federal employees, such as law enforcement officers and air traffic controllers, and private-sector firefighters.

How is the rule of 55 different from 72(t) payments?

The rule of 55 depends on when you leave your job. A 72(t) plan, or series of substantially equal periodic payments, works at any age, but the IRS says the payments must continue for at least five years or until you reach age 59½, whichever is longer. From a 401(k), you must have left that employer before the payments begin.

Sources

1. IRS: Topic No. 558, Additional Tax on Early Distributions From Retirement Plans Other Than IRAs
2. IRS: Retirement Topics – Exceptions to Tax on Early Distributions
3. IRS: 401(k) Resource Guide – Plan Participants – General Distribution Rules

This guide is general information, not personal advice. Your situation may differ, so consider talking with a qualified professional, such as a fiduciary financial adviser, CPA or licensed agent, before making a decision.