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Rule of 55: An early retirement provision for your 401(k) or 403(b)

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Thinking about retiring early? It's an option for many people in their 50s—but you may worry about paying a hefty tax penalty if you need to access your retirement savings.

While you generally can't tap into retirement money before age 59½ without paying an additional 10% tax, the IRS makes some exceptions, such as the "rule of 55." This provision allows penalty-free withdrawals from specific retirement plans if you leave your job during the calendar year you turn 55 or after. The upshot: You get access to your hard-earned savings a bit sooner. And can begin the next phase of life on your schedule.

What is the rule of 55, and how does it work?

The rule of 55 is an exception set by the IRS that allows people age 55 or older to withdraw from employer-sponsored retirement plans without facing the typical 10% tax penalty. You're still responsible, however, for paying income taxes on the withdrawals.

To qualify for the rule of 55, you must meet the following requirements:

  • You must quit, get laid off or retire from your employer in the calendar year you turn 55 or later.
  • Public safety officials like firefighters, police officers and EMTs can begin withdrawing in the calendar year they turn 50 years old.
  • The rule only applies to the employer-sponsored retirement plan (i.e., a 401[k] or 403[b]) with your most recent employer. If you have other retirement plans, such as an older 401(k) or a traditional or Roth IRA, that money can't be accessed without penalty until you turn 59½.
  • You must leave whatever money you don't withdraw in your employer's account until you turn 59½.

Who is it designed for?

The rule of 55 doesn't apply to everyone's situation. But it does provide a path for those nearing retirement who want to explore other options. This includes:

  • People in their mid-50s who have hit their financial retirement goals and want to start retirement earlier than usual.
  • Those who want to change careers and need income to help bridge the financial gap while finding a new job or starting a business.
  • Individuals who have health issues or disabilities that make working a challenge and may need funds to cover health care costs.
  • Employees offered early retirement plans or those laid off in their mid-50s who may need income to face these unexpected changes.

How to use the rule of 55

Having an employer-sponsored retirement plan that allows for this rule isn't automatic, so it's important to confirm it with your employer first. If your employer does offer it, and you've run the numbers on your financial plan, pick a retirement date (at age 55 or later), complete the paperwork, and choose your withdrawal frequency.

As you consider the process, you may want to consult a financial advisor to review your tax implications, monitor withdrawals and develop a tax strategy.

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Rule of 55 pros & cons

There's no one-size-fits-all journey to retirement. This approach can offer a balance between immediate financial flexibility and long-term security. However, careful consideration is critical because it may add complexity to your plans.


  • Penalty-free withdrawals. You can access money from your employer-sponsored retirement plan without the 10% early withdrawal penalty.
  • Facilitates early retirement. The prospect of retiring before 59½ can be an exciting step toward beginning the next phase of your life.
  • Financial planning flexibility. If you're in your 50s, this can give you more options for income, new investments or ventures.
  • Helps preserve savings. These funds can reduce your reliance on other savings and help you avoid taking Social Security benefits early.


Is the rule of 55 right for you? 5 questions to ask yourself

The rule of 55 provides options, but it's not ideal for everyone. Here are some things to consider as you determine if it's right for you.

1. What if you go back to work?

This rule applies to the qualifying employer-sponsored retirement plan you had at your last employer when you left the job. So you can take a new job and even contribute to a new 401(k) and not impact withdrawals. You have options for those other savings accounts or 401(k) plans when you retire.

2. What if you have multiple retirement plans?

It won't affect any other retirement saving plans, such as a Roth IRA. It only applies to your employer-sponsored retirement plan when you leave that job. You'll need to wait until the prescribed withdrawal dates for the rest of your retirement plans to avoid tax penalties.

You may be able to roll over other investments1 into your employer-sponsored plan, but that may require careful planning (and you should do that before you leave your current employer).

3. What happens to your health insurance?

Leaving your job may affect your health insurance options, especially if you're too young to qualify for Medicare. Review options with your spouse to see if you can get on their plan, or look at COBRA, the health insurance marketplace or short-term plans.

4. Will it affect your Social Security benefits?

You still need to wait until at least age 62 to begin claiming Social Security benefits.2 However, a few years of zero working income between early retirement and claiming Social Security could reduce your overall benefit.

5. Are there other options for early withdrawals from retirement accounts?

The IRS provides guidelines on exceptions to the tax penalty on early distributions. Although there are other options, you may need to meet strict rules to qualify for an exception.

  • Substantially Equal Periodic Payments allows individuals younger than 59½ to withdraw funds penalty-free, but it must be for at least five years or until 59½, whichever is longer, and the payments must be consistent and equal.
  • You may be able to withdraw to cover some unreimbursed medical bills.
  • If you become totally and permanently disabled, you can dip into your 401(k) or IRA without a tax penalty.
  • If you're unemployed, you can take funds from your IRA to pay for health insurance premiums.

If you're in a position to retire early, you have options

For those looking to retire early, not having access to a retirement income through a 401(k) or 403(b) can make it more challenging. But that doesn't mean it's not a potential option; it just requires additional planning.

The rule of 55 makes it possible to start thinking about next steps and can give you the income to help make it happen. To review your options, consider speaking with a financial advisor. They can look at your current financial situation and retirement goals to help you set a path for the future.

1 There may be benefits to leaving your account in your employer plan if allowed: You will continue to benefit from tax deferral; there may be investment options unique to your plan; fees and expenses may be lower; plan assets have unlimited protection from creditors under federal law; there may be a possibility for loans; and distributions are penalty-free if you terminate service at age 55+. Consult your tax professional prior to requesting a rollover from your employer plan.

2 Thrivent financial advisors and professionals have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration.