What is the rule of 55 for your retirement assets?

What is the rule of 55 for your retirement assets?

Most people know that in order to withdraw money from an IRA or Roth IRA penalty free, the IRS makes you wait until age 59.5. Once you hit that number, you no longer fall victim to the 10% early withdrawal penalty (although taxes may still apply). The same goes for your employer sponsored plan, like a 401(k) or 403(b) account, where withdrawals are penalty free and clear after age 59.5. There is a caveat for the 401(k) and 403(b), and that is the rule of 55.

If you leave a job in the year you turn 55 or later you are able to remove funds without paying that 10% fee to the IRS. This applies regardless of whether you were laid off or retired. To be clear, an employee cannot quit said job at age 52 or 54 and then start taking distributions from the 401(k) at age 55 (extenuating circumstances notwithstanding).

Some employers may not offer this rule of 55 benefit, so you will want to check the verbiage of the plan document. Additionally, some employers may force a lump sum withdrawal if pre 59.5 penalty free distributions are allowed.

Note, once funds are rolled out of a 401(k) or 403(b) and into an IRA, the rule of 55 is longer applicable and you will have to wait until age 59.5 before penalty free withdrawals can be removed.

The entire point of a 401(k) account is to help support your future self in retirement, so the earlier you remove funds from these types of accounts the less you will have in the years ahead, so be mindful. Nonetheless, it is good to know your options and the rules when it comes to your hard-earned money.

Consult a financial advisor for more best practices.

-Your friends at Red Oak Financial Group