Q: Does the IRS “55 Rule” mean that if I retire in the year I am 55 years old that I qualify for the Rule. For example, If I turn 55 in November and it is now August- that I could retire and my 401(k) would fall under this Rule until I am 59 1/2. This way (if needed) I could access some of my 401(k) without the 10 percent penalty. I plan on retiring just a few months before I turn 55.
A: Great question, please refer to the following link: http://www.irs.gov/taxtopics/tc558.html
Additional exceptions to the 10% additional tax, Item 1 states:
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 defined benefit plan if you were a qualified public safety employee (State or local government) who separated from service on or after you reached age 50.
As long as separation occurred in or after the year you reached age 55, the IRS allows you to take distributions from your 401(k) without paying the additional 10% tax.
Please keep a few things in mind:
- Confirm with your 401(k) plan administrator that you can keep your funds within the plan.
- Distributions from the 401(k) will still be subject to ordinary income tax (federal & state).
- If you do rollover your 401(k) into an IRA, the 10% additional tax will be in effect until you reach age 59 1/2.