Losing a job at 55 can bring a lot of financial uncertainty, especially when much of your savings may be sitting in a retirement account you thought you couldn’t touch yet.
But there’s an IRS exception that may help. If you separate from your employer during or after the calendar year you turn 55, you may be able to take money from that employer’s qualifying retirement plan without paying the usual 10% additional tax on early distributions.
It’s commonly known as the Rule of 55, and it can apply whether you were laid off, fired or chose to leave your job.
Do You Qualify for the Rule of 55?
Normally, taxable distributions from a retirement plan before age 59½ may be subject to an additional 10% tax.
The Rule of 55 provides an exception when you separate from service with your employer during or after the calendar year in which you turn 55.
That calendar-year rule is important.
For example, if you turn 55 in December but leave your job earlier that same year, you may still meet the age requirement. You don’t necessarily have to wait until your 55th birthday to separate from service.
The reason you leave isn’t the key issue. The IRS rule is based on when your separation from service occurs.
Which Retirement Account Qualifies?
This is where things can get confusing.
The exception applies to qualifying employer retirement plans connected to the employer from which you separated after meeting the age requirement.
For example, if you left an employer when you were 50 and still have money in that company’s 401(k) when you turn 55, simply reaching age 55 doesn’t make withdrawals from that old account qualify under this exception. Your separation from that employer happened too early.
The Rule of 55 also doesn’t apply to distributions from IRAs, including traditional IRAs, SEP IRAs and SIMPLE IRAs.
That’s an important distinction if you’re thinking about moving retirement money after leaving your job.
Be Careful Before Rolling the Money Into an IRA
If you think you may need to use the Rule of 55, don’t automatically roll the qualifying employer-plan money into an IRA before understanding the consequences.
The separation-from-service exception doesn’t apply to distributions from an IRA.
That means moving eligible employer-plan money into an IRA could affect your ability to use this particular exception on later withdrawals from those funds.
Before making a rollover decision, review your options carefully and consider speaking with your plan administrator or a qualified tax or financial professional.
What Should You Do Before Taking Money Out?
Even if you meet the IRS requirements, your retirement plan’s own distribution rules still matter.
Contact the plan administrator for the employer you separated from and ask:
- Whether your account is still held in that employer’s plan
- What distribution options the plan allows after separation from service
- Whether partial distributions are available
- What paperwork is required to request a distribution
Some plans may offer more flexibility than others, so don’t assume you’ll automatically be able to withdraw money in exactly the way you want.
You’ll Usually Still Owe Income Tax
The Rule of 55 doesn’t automatically make your retirement money tax-free.
Instead, it provides an exception to the 10% additional tax on early distributions when the requirements are met.
A taxable distribution from a traditional retirement account can still be included in your taxable income.
That means it’s important to consider the potential tax impact before deciding how much to withdraw.
Public Safety Employees Have Different Rules
Some qualified public safety employees have a more generous exception.
For qualifying distributions, the additional 10% tax exception may apply after separation from service once a qualified public safety employee reaches age 50 or completes 25 years of service under the plan, whichever comes first.
Special rules cover certain qualified public safety employees, including categories such as law enforcement officers, corrections officers, firefighters, customs and border protection officers and air traffic controllers.
Federal law also extends special treatment to certain qualifying private-sector firefighters.
Because these rules depend on the type of employee and retirement plan involved, public safety workers should verify which exception applies to their specific plan before taking a distribution.
Is the Rule of 55 Still Available Right Now?
Yes.
The separation-from-service exception remains available under current federal tax law.
It isn’t a temporary application program with a limited enrollment window. Instead, eligibility depends on factors such as your age, when you separated from your employer, the type of retirement plan involved and where the money is held when you take the distribution.
Relief Recap
If you separate from an employer during or after the calendar year you turn 55, you may be able to access money from that employer’s qualifying retirement plan without paying the usual 10% additional tax on early distributions.
But there are a few important catches.
The exception doesn’t apply to IRAs, simply turning 55 doesn’t make every old employer retirement account eligible, and your retirement plan may have its own rules about when and how you can take distributions.
You’ll also generally still need to consider regular income taxes on taxable withdrawals.
Before moving money out of the employer’s plan or rolling it into an IRA, make sure you understand how that decision could affect your eligibility for the Rule of 55.
