Distribution: Rule of 55 - Early Withdrawal Penalty Waiver

What is the Rule of 55?

If you turn 55 (or older) during the calendar year you lose or leave your job, you can begin taking distributions from your employer-sponsored retirement account, without paying the early withdrawal penalty. There are a number of considerations to factor into the decision. For example, you must still pay taxes on your withdrawals. Please read below and work with your financial or tax professional before making decisions on account withdrawals.

5 things to know about the Rule of 55

Before you start withdrawing money from your employer sponsored retirement account, it's important to understand five things about the Rule of 55.

1. Rule applies to employer-sponsored retirement plans, not IRAs.

The rule only applies to company-sponsored retirement accounts (so not IRAs) and you must still pay normal taxes on your withdrawals.

2. You can withdraw only from the plan specific to your most recent employer

Before you start taking distributions from multiple retirement plans, it's important to note the withdrawal rules for those 55 and older apply only to the plan with your employer at the time you leave your job.

In other words, you can only take those penalty-free early withdrawals from the plan you were contributing to at the time you left or were let go. The money in other retirement plans must remain in place until you reach age 59½, if you want to avoid the penalty and potential additional tax liabilities.

3. You must leave your job the calendar year you turn 55 or later

The Rule of 55 doesn't apply if you left your job at, say, age 53. You can't then start taking distributions and avoid the early withdrawal penalty once you reach 55. However, you can apply the IRS Rule of 55 if you're older and leave your job. If you get laid off or quit your job at age 57, for example, you can start taking withdrawals from the retirement account you were contributing to at the time you left employment.

4. Check the plan rules before requesting the Rule of 55.

First, confirm if your employer's retirement plan offers "partial" or "installment" withdrawals. Many do not, so you can do the Rule of 55, but may have to take all the money out at once. And, as a reminder, if you instead roll money into an IRA, you can no longer avoid the penalty for subsequent withdrawals.

Second, if you made Roth contributions, these withdrawals are usually tax-free, so determine if taking withdrawals from your Roth account in the retirement plan makes sense. Have you already completed your 5 year "Roth Clock"? You may want to roll Roth monies to IRA and separately request the Rule of 55 for just pre-tax accounts. But remember, normal taxes still apply, so ensure you talk to your financial or tax professional and research your timing before taking the withdrawal. The Rule of 55 only applies to waiting the early tax withdrawal penalty, not regular taxes on a withdrawal.

5. You can withdraw from your employer-sponsored retirement account, even if you get another job.

Finally, even if you get another job later, the Rule of 55 can still be available to you. Let's say you turn 55 and retire from work. You decide you need to take penalty-free withdrawals under the Rule of 55. Later, at age 57, you decide you want to get a part-time job. You can still take distribution from your old plan account, as long as it was the retirement account you were contributing to when you quit at age 55—and you haven't rolled it over into another plan or IRA.

Conversely, if you roll your account into your new employer's retirement plan, then you would not be able to use the Rule of 55 for that rollover balance, because it is no longer in the original plan.

Note: It is always recommended to review your choices carefully and consider working with a tax or financial planning professional to determine which options work for your situation.

Article ID: 178, Created: 6/16/2026 at 6:14 PM, Modified: 6/16/2026 at 6:14 PM