Why the Rule of 55 Is a Powerful Tool for Retiring Early!

Why the Rule of 55 Is a Powerful Tool for Retiring Early!
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[@Joenzinator]

I plan on retiring early. When I was younger I didn't take advantage of Roth 401(k), so a high % of my 401(k) is traditional. I didn't know I could access it at 55, so that's great news.

[@papasquat355]

And, if you're in certain public safety positions, you can access them at 50.

[@glasshalffull2930]

Good for you! Just be sure you have the health insurance cost covered once you retire. This is a big shock for those who had company subsidize health insurance while they were working.

[@PeterMurrayj]

Can't wait to retire and see there are no tax brackets anymore. Flat high tax incoming. Wish me luck.

[@Joenzinator]

@@glasshalffull2930 I've been pumping money into my HSA for years now to cover the insurance premiums.

[@edhcb9359]

@@PeterMurrayjFlat taxes are coming huh? 😂

[@rayanderson3164]

This rule is what is making retirement next year at 55 a reality. My 401K is the 800# gorilla in our arsenal. 7 months to go! The plan to put all the Roth 401K money into my Roth IRA, then put the bulk of the rest in my IRA, then live on the rest until after 60 and do further Roth conversions along the way.

[@anniealexander9616]

Great information! Retiring shouldn't have so many rules.

[@jhouser972]

I plan on retiring at 55; however, I don't plan on withdrawing from my 401k until I am 60. In that case, does my 401k stay invested, or do I need to move it to another account?

[@AL-ns5jc]

Great video. My HR director has no clue what I’m talking about and states she did some research, and it appears to be an IRS thing which is true. I have another email into her to see if there are any stipulations to distributions or if it’s allowed at at. I have any 2 years however this would be great if I could use this.

[@RyanClark-e8o]

Can you retire at say 48 and go back to work the year you turn 55 to consolidate 401Ks and turn around and retire again? Would you need to be at the employer for X amount of time? Curious about any stipulations there.

[@christine-jx4fh]

I'd like to know the percentage of 401K plans that actually allow the rule of 55. Your HR department sets up these plans and they have no idea what they're doing. My plan only allows withdraws after 65 and we have over 1000 employees.

[@nathandeleon1989]

Does the rule of 55 include the federal TSP?

[@wkusam123]

Let's say your employer offers a 401k, but not a match. Is there any advantage to a pre-tax 401k over a traditional brokerage investment account with after-tax money? Outside of capturing any matching funds from an employer, I don't think I've ever understood the value of a 401k.

[@yomojoe1]

What about solo 401ks?

[@nathanclark2361]

Clarification needed! Do you have to still be working for the employer of your last 401k, or does the plan just have to be your most recent 401k?

[@J-2024-v8i]

When checking if your plan allows the rule of 55, don’t just confirm that it states that distributions at 55 or after are penalty free, but instead mainly check that it allows PARTIAL DISTRIBUTIONS after separation from service. Many plans only allow you to leave it all in the plan or distribute/rollover it all at once out of the plan at once. Other will allow for set amounts (e.g., a % of the balance) to be distributed each year without your control. Whatever the rules are, ensure they are clearly written in the plan. I had a major issue with Fidelity where they reassured me on the phone three times (different reps) that the rule of 55 was allowed by the plan, even if it was not written in it, and it turned out after I quit the job that it was not. All I got from Fidelity was an apology!

[@jeffs2559]

My plan documents say “ad hoc withdrawals” so I confirmed that that translates to any amount, any time.

[@joelcorley3478]

FWIW, I suggested below a possible work-around for plans that do not support partial distributions...

[@J-2024-v8i]

@@joelcorley3478 Thanks but I am not sure what response you are referring to. If you mean to rollover to a new employer 401k, that would not apply when you have retired.

[@joelcorley3478]

​@@J-2024-v8i - I've quoted the entire reply I was referring to at the end of this message. When I talk about a 60-day rollover, I'm talking about rolling funds out of your previous employer's 401(k) plan into some other retirement plan. That plan can be either a new employer's plan or a Traditional IRA. Either works. You just have to take a distribution into your own account and then within 60 days deposit the funds you won't need before 59 1/2 into that other account. And just because you are able to exercise Rule of 55, doesn't mean you are or are not retired. It just means you left an employer on or after the year you turned 55 and before you turned 59 1/2. And some people might take on a contracting or consulting gig that offers a 401(k) after retiring at 55 - my girlfriend did that. They might also take a job at Starbucks for the insurance coverage (Barista FIRE), but they still want access to those funds for "retirement". But by taking the full distribution and rolling over some what you don't need, you can gain access to some of it without paying taxes and penalties on the entire balance. ------------------ Quoting Previous Post ----------------------- An employer sponsored retirement plan does not have to "support" Rule of 55, per se. It just needs to permit partial distributions after you leave. Don't believe me? Go read the instructions for Form 5329 (Additional Taxes on Qualified Plans), Line 2, Exception Code Number 01. You can claim this exemption even if your employer's custodian fails to report Code 2 in Form 1099-R, Box 7 when reporting your distribution! The only problem with some 401(k) plans is that they don't let you take partial distributions. Some don't let you take partial distributions at all, some don't let you take partial distributions before 59 1/2. In either case, you can partly work around this by taking a full distribution of the 401(k) and then doing a 60-day rollover of all the money you WON'T need between now and 59 1/2 into a Traditional IRA! Obviously this work-around is best done as close to age 59 1/2 as is practical. Paying taxes on 4 1/2 years of expenses all at once is far from ideal. But if you have Roth IRA contributions, HSA savings with qualifying expenses and of course savings in a taxable brokerage account, it may be reasonable to retire and then in a subsequent year when your income would be low, use this strategy to boost your taxable savings... So it's not really true that an employer can block your use of Rule of 55. It is true that they can make using Rule of 55 very difficult and doing so may require lots of planning. But those are not the same things.

[@J-2024-v8i]

@@joelcorley3478 Thanks very much for the comprehensive response!. So, it seems with this strategy you accomplish one partial distribution from the 401k without the 10% penalty, and the remainder will end in the IRA, as oppose to rollover first the IRA, which would incur a penalty on any distributions before 59.5. Smart!

[@dukefamily]

What does that number by that cyber truck represent? I see it change every so often. Often wondered. Thanks.

[@iliaveksler1286]

Current number of subscribers to the channel.

[@jessefletcher9116]

we retired last year, 56 and her 55, Rule of 55 is our ticket to ride! One drawback: her 401k administrator only allows one distribution per year and they deduct 20% for federal tax and 5% for state tax. That's a massive overpayment of tax so we plan on taking that distribution as close to December as possible.

[@semosancus5506]

Can you tell me how you "prove" to the IRS that you don't owe a 10% penalty because you qualify for the rule of 55? Does the administrator of the 401k mark the distribution as exempt from the penalty using some code or something? I'm on the verge of retiring and using the rule of 55, but can't seem to get any straight answers from the employer or plan administrator on the nuts and bolts of it.

[@jessefletcher9116]

@@semosancus5506 your tax preparer is the one who will communicate that to the treasury, so even if the 401k administrator had held an extra 10% for early distribution penalty you would get it back like any other overpayment of taxes, just the aggravation of knowing that the treasury had your money all that time.

[@semosancus5506]

@@jessefletcher9116 Great than2s for the reply. I'm also unsure if the plan has to allow for rule-of-55. I called them and they essentially said they don't care about rule of 55, that is between me and the IRS. But I thought the plan had to allow it in order for their not be a penalty.

[@joelcorley3478]

@@semosancus5506 - The 401(k) custodian can put a Code 2 in Box 7 of your 1099-R to indicate a Rule of 55 distribution was known to them. That's the simplest answer. But if the custodian doesn't do that, you can claim the exemption on Form 5329, Line 2 using Code 01. This can be used to explicitly claim the exemption on any employer sponsored plan distribution. Just make sure you are complying with the Rule of 55 when you claim the exemption.

[@jessefletcher9116]

@@semosancus5506 getting a straight answer from the company is like pulling wisdom teeth, just remember that HR is not there to serve employees so much as they are there to protect the company from employees.

[@donmountford797]

I know using the rule of 55 you can only pull from your current employer but what if you had done a rollocer from previous employer into current 401k. Is that money available as well

[@joelcorley3478]

That works. It doesn't matter where the money in the current employer's plan came from.

[@donmountford797]

@joelcorley3478 Thanks. That is what I thought, but I was concerned I would rely on that money and be unpleasantly surprised at tax time!

[@joelcorley3478]

@@donmountford797 - Actually there's a fine point here. Rule of 55 applies to distributions from ANY employer sponsored retirement plan as long as you separated from service in or after the year you turn 55. This means you can actually have more than one employer sponsored plan with Rule of 55 eligible distributions.

[@DavidJames-it8ne]

Does it work with a 403b?

[@joelcorley3478]

Yes. Worse case it can be claimed as an exemption from penalty on Form 5329, Line 2, Code 01. Code 01 can be applied to any distribution from an employer sponsored plan.

[@mandizmouth2952]

Would you recommend pulling from your 401k at 55 using the Rule of 55 OR using cash until reaching age 59.5?

[@papasquat355]

Whatever produces the lowest income tax burden. It may be best to use a combination since drawing out of a long-term brokerage may result in a 0% capital gains burden.

[@glasshalffull2930]

If you postpone pulling from the 401K, this will allow the growth portion to grow for another five years. I was able to do exactly this as I had a cash reserve, wife still worked and I had a few side hustles each year. I stayed fully in the S&P500 and it grew from $1.2 million to just over $3 million in those five years.

[@joelcorley3478]

In my opinion keeping money in your tax advantaged accounts is almost always for the best. These accounts completely avoid taxes on investment earnings - something you cannot avoid in a taxable account. Whether or not you use "cash" is perhaps a different question... You can have cash in different account types. Perhaps you mean, Should you use taxable assets?

[@rehanahmad5911]

What is you are self employed and have a solo 401k?

[@joelcorley3478]

Rule of 55 still applies to solo 401(k)s. Just try to make sure your solo 401(k) allows for partial distributions. That's usually what creates problems.

[@CorsoandMastiffadventures]

Gotta hope my military pension isn't completely worthless by the time I hit REAL retirement haha

[@Pantherhandz]

I rely pretty heavily on it as well. Fingers crossed.

[@cutehumor]

If you want to retire earlier than 59.5, the Roth 401k is a waste of time. Can you imagine skipping the tax deduction on the 401k contribution to do Roth from ages 22 to age 55, then when you take Roth 401k out with irs rule of 55 but you have to pay the taxes on the Roth gains. 😂

[@dheezknutz]

🔥

[@JeffWilliamfick]

Purchase (2) modest investment rentals. (I own 4.) It is a part-time hands-on business and a ticket to a comfortable retirement if you are willing to deal with the headaches. I buy clean low-mileage cars in cash and I carry no balance on credit cards. I "retired" 10 years ago and my portfolio is worth more now (inflation considered). I will not outlive my resources if I live to be 100.

[@BenjaminCooper-sd8ow]

Secure a good financial advisor to help guide you on where to put your money. I have one and my returns are a lot higher. 7% on average on my 401k and 9% on my husband and I’s ROTH. IRA is a bit lower at 6%. Also he recommended that I build up some cash before retirement (that was sitting in savings) by putting it into Tbills that are paying out 5%.

[@BradleyMaurice226]

Could you kindly elaborate on the advisor's background and qualifications?

[@JeffWilliamfick]

There are a handful of experts in the field. I've experimented with a few over the past years, but I've stuck with Becky Lou Gordon for about five years now, and her performance has been consistently impressive. She’s quite known in her field, look-her up.

[@BradleyMaurice226]

I looked up her name online and found her page. I emailed and made an appointment to talk with her. Thanks for the tip.