__To win at any game, you first have to know the rules. That’s true for everything from *Monopoly* to your 401(k).__

Managing your 401(k) is certainly no game. It’s serious business and a little-known rule about your 401(k) could be a real blessing in a financial crisis.

If you have a 401(k) retirement plan, you know it’s filled with unpopular rules, but one is an exception. It’s the so-called “Rule of 55.”

Normally, you’re not allowed to withdraw money from your 401(k) without incurring a 10% penalty until you reach age 59 ½. Under the Rule of 55, that penalty is waived once you reach 55. It also applies to 403(b) retirement accounts, the equivalent plan for non-profit organizations.

Unfortunately, the rule doesn’t apply to individual retirement accounts, either traditional or Roth. For those, you still must be 59 ½ before making penalty-free withdrawals.

Also, the rule applies only in a few specific conditions. For example, if you’re 55 or older and leave your job, you can withdraw funds without the penalty. To be clear, you *can’t* take advantage of the rule if you’re still working at the company where you have the 401(k) or 403(b).

You must also leave that job in the calendar year you turn 55 or later to be eligible for the penalty-free distribution. (The eligibility age is 50 if you’re a public safety worker, such as a police officer, firefighter, or air traffic controller.)

If you leave or lose your job *before* your eligibility, you miss out on the rule entirely. You can’t take a penalty-free withdrawal until you reach the usual age of 59 ½.

As with all exceptions to the 10% penalty, the rule of 55 still has tax implications. It doesn’t get you out of paying taxes on your withdrawals, which are considered income on your federal return and probably your state return if your state has an income tax.

__The Rule of 55 doesn’t apply to retirement plans from previous employers. It can only be used with a 401(k) plan at your latest job to be eligible.__

However, there’s a way around the provision that excludes previous 401(k) or 403(b) accounts. You can roll those funds over from a previous account to your current one, if your employer accepts rollovers. Not all do, so check with your HR department to find out.

Then, once you’ve completed the rollover, all of the money in your current account, including the *transferred* amount, will be available if you make an early withdrawal under the rule of 55.

Of course, just because you *can* do something, doesn’t mean you *should.* In almost all cases, tapping into a retirement plan of any type is not advisable because you’re essentially robbing your future and giving up not just the money, but also the *time* you’ve invested in building up those assets.

You may be able to replace the funds eventually, but you can *never* get back the time, which is critical for long term, compounding gains in your portfolio. You’re essentially starting over, but with less time before retirement. You want to avoid early withdrawals if at all possible, even if you can do it without the 10% penalty under the rule of 55.

__Proverbs 13:11 teaches, *“Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.”*__

When *would* it be okay to take an early withdrawal from a 401(k)? Only when you have no other choice. You can only use the rule of 55 if you’re no longer with the employer holding the account, which probably means you’ve lost your job.

Even then, however, you should delay as long as possible before making an early withdrawal from your 401(k) or 403(b). You can use the [Mayday Budget](https://www.moneywise.org/moneywise/the-mayday-budget-1923) to help prioritize your spending.

This is all a good reminder that you should have an adequate emergency fund of 3 to 6 months’ living expenses saved up *before* financial calamity strikes. You would exhaust *that* before making a withdrawal from your 401(k) or 403(b). The Mayday Budget will help you make those emergency dollars go further.

__The Rule of 55 could be a lifesaver in stormy financial seas, but it’s one you should hope never to need.__

You can also __[listen](https://www.moneywise.org/search?q=Unknown%20401(k)%20Rule?&videos=true&articles=true&podcasts=true&posts=true&groups=true&events=true&support=true)__ to the related podcast on this topic.

FaithFi

Articles

The Rule of 55 could be a lifesaver in stormy financial seas, but it’s one you should hope never to need.

INVESTING | Dec 29, 2022

Unknown 401(k) Rule?

By: Rob West & Jim Henry

Where Faith Meets Finance

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