The rule of 55 is an IRS guideline that allows you to avoid paying the 10% early withdrawal penalty on 401(k) and 403(b) retirement accounts if you leave your job during or after the calendar year you turn 55.

Employer-sponsored, tax-deferred retirement plans like 401(k)s and 403(b)s have rules about when you can access your funds. As a general rule, if you withdraw funds before age 59 ½, you’ll trigger an IRS tax penalty of 10%. The good news is that there’s a way to take your distributions a few years early without incurring this penalty if your current plan provides for such distributions.

It’s important to note that the rule of 55 does not apply to all 401(k)s and is not available at all for traditional or Roth IRAs.

The rule of 55 is an IRS guideline that allows you to avoid paying the 10% early withdrawal penalty on 401(k) and 403(b) retirement accounts if you leave your job during or after the calendar year you turn 55. The rule applies regardless of the terms of your separation, so you can take advantage of it whether you’re laid off or decide to retire early.

For some public service employees who have a 403(b) might have the option to begin taking withdrawals five years earlier (in the calendar year you turn 50), depending on their situation.

The distributions are not completely tax free: Like all withdrawals from a traditional 401(k) or 403(b), you do have to pay income tax. Only the 10% tax penalty is bypassed in this scenario.

Please note that employers are not obliged to allow early withdrawals; and, if they do allow them, they may require that the entire amount be taken out in one lump-sum withdrawal. This could expose you to a higher income tax.

This rule applies to current – not former – 401(k) or 403(b) plans. The government does not permit penalty-free withdrawals before 59.5 from plans you had with a previous employer. If you want access to that money under the rule of 55, you would have to transfer those funds into your current 401(k) or 403(b) plan.

You fully understand that your funds must be kept in the employer’s plan before withdrawing them and you can only withdraw from your current employer’s plan. If you roll them over to an IRA, you lose the rule of 55 tax protection.