Not everyone waits until their 60s or 70s to retire. If you want to retire early, there may be a way to put the money you have saved in a retirement savings account to good use.
The “Rule of 55” allows you to avoid penalties for withdrawing from a 401(k) or 403(b) before you turn 59 ½ without facing an early withdrawal penalty. But putting 401(k) money into an individual retirement account (IRA) can make you ineligible. Here’s what you need to know.
Rule 55, he explained
The Rule of 55 states that if you retire at age 55 or older, you can make penalty-free withdrawals from your 401(k) or 403(b) plan even if you are under age 59 ½. This rule serves as an important bridge that can last until the funds in the IRA are reached without any penalties.
However, this rule only applies to workplace programs. You will likely still be subject to a 10% penalty on the IRA if you withdraw before age 59 ½. You still have to pay income taxes on any regular retirement plan withdrawals.
This rule is conditional and does not apply to everyone. All 401(k) and IRA withdrawals are penalty-free if you’re 59 ½ or older. People working until age 60 will not need to consider the 55 rule, but it may apply to people who want to leave the workforce early and have the financial means to support their retirement.
Why an IRA rollover can be problematic
IRA rollovers can be beneficial if they allow you to access better investment options, but those same rollovers are not eligible for the 55 rule.
“Remember that it only applies to the former employer’s retirement plan. Rollover IRAs from 401(k)s are not included in this rule and withdrawals may result in penalties,” said Michael Rusinak, vice president of Fidelity Financial Solutions.
Individuals planning to retire between the ages of 55 and 59 ½ need to evaluate the risks of skipping multiple 401(k) funds into an IRA. It’s also a good idea to check your 401(k) withdrawal rules. Some programs allow for less flexible withdrawals, while others are more restrictive.
Things to consider before transferring money
There are a few things to consider before withdrawing money from a 401(k) to an IRA. Although these investment options and features should be evaluated, it is also important to ensure that you plan to work in your 60s and beyond. If you want to take advantage of the 55 rule, you must save enough money in your 401(k) to pass the 59 ½ threshold, when IRA withdrawals are penalty-free again.
Workers in their 50s still have time to increase their 401(k) contributions before making that decision. For example, there is a catch-up contribution limit of $8,000 for anyone age 50-59 or age 64 or older in 2026. People aged 60-63 are eligible for a maximum catch-up contribution of $11,250. The standard contribution limit is $24,500 for workplace retirement accounts. IRAs have different limits and are not subject to maximum holding contributions.
Retirement is not just about achieving a net worth goal. It includes having enough cash to cover your expenses. If you’re retiring early, you may need a nest egg large enough to serve as a bridge. People using the 55 rule need bridges large enough to pass 59 ½ to be able to roll over into IRAs without penalty. Some people build a large enough financial bridge to cover several years of living expenses to be able to claim Social Security at 70.
Each person has different goals and financial circumstances. Figuring out when you want to retire and reviewing your numbers can lead to informed decisions.
