Anyone Use the' Rule of 55' to take out Contributions Early Without Penalty?

[Otter+Badger]

Hello,

I was wondering if anyone had planned their FIRE date based on being able to take advantage of withdrawing all of their current 403b or 401K contributions without the 10% penalty when they turn 55? See more here: https://www.forbes.com/advisor/retirement/rule-of-55-retirement/

This timeline would be perfect for when we want to retire as my DH could use his 403b account to be our 'bridge' until we were able to access my 401(k) account at 59.5 and he could begin collecting social security at 62.

I'm not sure how to know if his employer will allow us to do it with their program. I don't see it referenced in his employee manual under the retirement plan.  I definitely don't want to have him ask them seven years early, so as to create any issues with his boss. But, without knowing for sure we can definitely do this, I'm not sure if it is safe to sock away so much money in that vehicle alone or if we should be saving our 'bridge' money in a regular investment account.

I also was confused by the wording that you have to pull the trigger by leaving the job in the year you turn 55 or after?  What does 'after' mean?  Does that mean if you turn 55 in September, you get until August of the next calendar year to leave your job?

Anyone have experience doing this?  Or, looked into it and decided it was not feasible for some reason?

Thank you so much!

[bacchi]

"After" means from age 55 to 59.5, when anyone can withdraw without a penalty.

It's also an IRS rule; the plan documents don't matter. See https://www.irs.gov/taxtopics/tc558

[dodojojo]

There isn't a penalty if you access your 401K (and similar) anytime after 55?  Seems IRA are not included.

The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:

"Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55, or distributions made from a qualified governmental benefit plan, as defined in section 414(d) if you were a qualified public safety employee (federal state or local government) who separated from service in or after the year you reached age 50."

After separation from employer and you start tapping retirement funds, can you go back to work?  Part-time?

[Bird In Hand]

"After" means from age 55 to 59.5, when anyone can withdraw without a penalty.

It's also an IRS rule; the plan documents don't matter. See https://www.irs.gov/taxtopics/tc558

The plan documents matter if they specify the entire amount must be withdrawn as a lump sum upon separation, which some plans apparently do.

But even in that case, you can reserve the amount you need to live on for the next year, roll the rest into your IRA, and start a SEPP that will go to age 60 or 61.  Hopefully SEPP + Roth + Taxable would be enough to bridge the gap.

[aetheldrea]

I am not familiar with 403b rules. My company’s 401k plan does not allow partial distributions after separation from service, so no Rule of 55 for me. Plan documents and how they are interpreted definitely matter.

[Turkey Leg]

Yep, I have withdrawn penalty-free from a non-Roth 401k. My understanding is this has to be allowed by your company. My first withdrawal was at age 55 years, 3 months. No penalties in three years of dipping into the ol’ piggy bank.

[terran]

I am not familiar with 403b rules. My company’s 401k plan does not allow partial distributions after separation from service, so no Rule of 55 for me. Plan documents and how they are interpreted definitely matter.

Yep, I have withdrawn penalty-free from a non-Roth 401k. My understanding is this has to be allowed by your company. My first withdrawal was at age 55 years, 3 months. No penalties in three years of dipping into the ol’ piggy bank.

These points have been mentioned by various people earlier in the thread, but to bring it all together: 1) the penalty free early withdrawal if you separate from service in or after the year you turn 55 is an IRS rule so what your employer says doesn't matter for that purpose, however 2) your employer can restrict your withdrawal options with the most restrictive option being only allowing full withdrawals. It's not ideal, but in this case 3) you can make a full withdrawal, keep enough to live on until you're 59.5 years old after being added to other options (Roth contributions, taxable, rule 72(t) SEPP withdrawals) and roll the rest over to an IRA in an indirect rollover within 60 days.

If this requires taking out more than one year's worth of spending in one year then you'll end up in a higher tax bracket than would otherwise be needed, so your employer's withdrawal rules do matter in that sense, but they don't matter as far as whether there's a penalty or not.

[Otter+Badger]

Yep, I have withdrawn penalty-free from a non-Roth 401k. My understanding is this has to be allowed by your company. My first withdrawal was at age 55 years, 3 months. No penalties in three years of dipping into the ol’ piggy bank.

Thank you for sharing your experience!  Did you talk to your employer ahead of time to find out how your company's plan was organized?  If I understand your experience, they are letting you take out a years-worth of money at a time, so you must have known they would allow you to do it that way.  Or did you just get lucky?

It is trying to figure out the details for his plan that make it hard to figure out how to do our planning.  I definitely don't want to get taxed on his full plan balance at once!

[SaucyAussie]

One point to clarify - it's the "year" you turn 55 (or after), not when you actually turn 55.  So if you are lucky enough to be born on December 31, you can retire penalty free at 54 and 1 day!

My whole plan is built around this rule, but it is getting harder and harder to stick it out at this job. 

Seriously considering jumping early and taking a job at Amazon, etc then roll my 401k into the new plan, then "retiring" again the year I turn 55!

[bacchi]

One point to clarify - it's the "year" you turn 55 (or after), not when you actually turn 55.  So if you are lucky enough to be born on December 31, you can retire penalty free at 54 and 1 day!

My whole plan is built around this rule, but it is getting harder and harder to stick it out at this job. 

Seriously considering jumping early and taking a job at Amazon, etc then roll my 401k into the new plan, then "retiring" again the year I turn 55!

I've considered it, too, but the thought of studying for an interview just leaves me dead inside.


interviewer: "Can you explain this large gap in your resume?"
me: "Yeah, I couldn't figure out how to do paragraph breaks in LaTex."*

Badum ching!


* Stolen from twitter.

[Turkey Leg]

Yep, I have withdrawn penalty-free from a non-Roth 401k. My understanding is this has to be allowed by your company. My first withdrawal was at age 55 years, 3 months. No penalties in three years of dipping into the ol’ piggy bank.

Thank you for sharing your experience!  Did you talk to your employer ahead of time to find out how your company's plan was organized?  If I understand your experience, they are letting you take out a years-worth of money at a time, so you must have known they would allow you to do it that way.  Or did you just get lucky?

It is trying to figure out the details for his plan that make it hard to figure out how to do our planning.  I definitely don't want to get taxed on his full plan balance at once!

It was a monstrously large company. Everything was well-documented and discussed on internal social media. So no surprises.

I take out what I want whenever I want. There’s a minimum…can’t remember exactly, but I think it’s $500.

We’ve taken out chunks to give away. We also take out money to live on. I try to keep around $10 or $20 thousand available in savings accounts for ready cash to live on. When we start to get below that, I login to the website and get more. (Of course, I try to cash in only when the Top Is In!)