Another early withdrawal penalty exception? The rule of 25

[terran]

Edit: Scratch that, it seems I found a typo in the instructions, which is something, but not a new exception to the early withdrawal penalty. See replies below.

I think many people on this forum have probably heard of the so called "rule of 55" that lets you withdraw from a workplace retirement plan if you leave the employer in or after the year you turn 55. Well, I was reading through the instructions for Form 5329 (as one does) and I think I might have discovered a further exception under the same rule that I've never seen mentioned before.

It wouldn't apply to many people, which is probably why it doesn't get talked about. Under exception 01, in addition to discussing the rule of 55, it adds an exception for "25 years of service under the plan." Unless I'm misinterpreting this, it would mean that if you started work at an employer before 30 years old and stayed at the same employer for 25 years you could withdraw from that workplace plan without paying a an early withdrawal penalty earlier than the oft-cited age 55. Say as early as 43-47 if you started work at 18-22 and stayed with the same employer.

I get that most people don't stay at the same job for so long, but I'm still a little surprised I've never seen this mentioned, so am I getting confused and that's not really what it says? Anyway, if I'm correct in my interpretation maybe the "rule of 25" would be worth mentioning when discussing the "rule of 55" since it might apply to some people.

[seattlecyclone]

I think they got the parentheses wrong in those instructions. The "or 25 years of service" clause is supposed to apply to public safety employees only. See IRC Section 72(t)(2)(A)(v) where the "rule of 55" is encoded in the law. It says nothing about 25 years of service there. Then in Section 72(t)(10)(A) it says that "age 55" is to be replaced by "age 50 or 25 years of service under the plan, whichever is earlier" for qualified public safety employees.

So if you start as a government-employed firefighter/cop/EMT/etc. before age 25 and stick around with the same employer for 25 years you could take advantage of this. Not much use otherwise.

[secondcor521]

Agree with seattlecyclone.  It's also a recent change made as part of SECURE 2.0.

See https://www.tsp.gov/bulletins/23-3 for example.

[terran]

Ah well, I suppose finding a typo from the IRS is something, but not as exciting as a new early withdrawal penalty exception (except for a very very small group).