Not everyone waits until they reach their 60s or 70s to retire. If you want to retire a bit earlier, there may be a way to take advantage of the money you’ve stored in a retirement savings account.
The “rule of 55” allows you to avoid penalties on withdrawals from a 401(k) or 403(b) before you turn 59 ½ without facing the early withdrawal penalty. But rolling 401(k) funds into an individual retirement account (IRA) can make you ineligible. Here’s what you should know.
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The rule of 55, explained
The rule of 55 states that if you retire from work at 55 or older, you can make penalty-free withdrawals from your 401(k) or 403(b) plan even if you have not yet turned 59 ½. This rule acts as a valuable bridge that can last until funds in an IRA can be accessed without any penalties.
However, this rule only applies to workplace plans. You will likely still be subject to a 10% penalty fee on an IRA if you withdraw before turning 59 ½. You still have to pay income taxes on any withdrawals from a traditional retirement plan.
This rule is situational and doesn’t apply to everyone. All 401(k) and IRA withdrawals are penalty-free once you are 59 ½ years or older. People who work into their 60s won't have to consider the rule of 55, but it can apply to people who want to get out of the workforce early and have the financial means to sustain their retirement lifestyle.
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Why an IRA rollover can be a problem
IRA rollovers can be beneficial if they let you access better investment options, but those same rollovers are not eligible for the rule of 55.
“Remember that it only applies to a former employer’s retirement plan. Rollover IRAs from 401(k)s are not included in this rule and withdrawals could incur a penalty,” Michael Rusinak, vice president of Fidelity Financial Solutions, said.
People who plan to retire between the ages of 55 and 59 ½ need to assess the risk of rolling over too many 401(k) funds into an IRA. It’s also a good idea to assess your 401(k)’s withdrawal rules. Some plans allow flexible partial withdrawals, while others are more restrictive.
What to consider before moving the money
There are a few things to consider before rolling over money from a 401(k) to an IRA. While these plans’ investment options and features should be assessed, it’s also important to verify if you plan to work at 60 and beyond. If you want to take advantage of the rule of 55, then you must keep enough money in your 401(k) to get you through the 59 ½ threshold, during which IRA withdrawals become penalty-free as well.
Workers in their 50s still have time to boost their contributions to 401(k)s before having to make that decision. For instance, there is an $8,000 catch-up contribution limit for anyone who is 50-59 years old or 64 years or older in 2026. People aged 60-63 are eligible for a super catch-up contribution of $11,250. The regular contribution limit is $24,500 for workplace retirement accounts. IRAs have different limits and are not subject to super catch-up contributions.
Retirement isn’t just about achieving a net worth target. It also involves having enough cash to keep up with your expenses. If you retire early, you may need a large enough nest egg to act as a bridge. People who use the rule of 55 need large enough bridges to get them through 59 ½ so they can tap into IRAs penalty-free. Other people build a large enough financial bridge to cover a few years of living expenses so they can claim Social Security at 70.
Each person has different goals and financial situations. Getting clear on when you want to retire and reviewing your numbers can lead to well-informed decisions.
