You’ve worked hard to build up your 401k, and now you’re at the point where you can access it early. There are many ways to access your 401k early, for some it may not be a smart move to do so, and for others, it`s the perfect one, every individual’s situation is different, especially if you’re about to quit or lose your job or are unable to find work quickly.
Here we will be talking about a regulation called the Rule of 55.
What is a 401k?
A 401k plan is a type of retirement savings account that’s sponsored by an employer. These plans are intended to help workers save for retirement on a tax-deferred basis. But, what exactly is a 401k? The name is derived from section 401(k) of Title 26 of the U.S. Code, which describes how these plans work.
Rule of 55
There is a loophole in the government regulation called Rule of 55, which says that if you’re over 55 years old and have been fired, laid off, or even quit working at a company that offers a 401(k) plan, you can start taking withdrawals from your account without incurring a 10% tax penalty.
Of course, you still would pay income taxes for whatever you withdraw from your 401k. Still, there are certain limitations to this rule, it is our understanding that you only can make periodic withdrawals, in other words, you cannot take a lump sum.
Avoid Early Retirement Tax Cut penalty with the rule of 55
The 10% early withdrawal penalty might dissuade a few from tapping into their retirement savings early. But if you’re between 55 and 59 1/2, you may qualify for an exception. This is only with the 401k, it is not allowed with your IRA if you have any.
To be clear, we are talking about your 401k of your current job, you cannot withdraw any other 401k that you may have from a previous job unless you are able to transfer that money to your actual 401k before you are 55.
It also depends on your actual job 401k structure.
Is it wise to make a withdrawal from your 401k before your retirement age of 59?
It can be difficult to save enough for retirement, but once you reach age 59 1/2, you’re allowed to withdraw money from your individual retirement account (IRA) and other tax-deferred retirement plans without penalty. But should you? And what other options do you have?
Here are some things to keep in mind if you’re considering an early 401k withdrawal.
Just because you can take a distribution from your retirement account doesn’t mean that you should. There are a number of reasons why you might want to access your funds early, but there are also a number of reasons why it may not be worth it. If you’re planning on retiring soon, accessing your funds early might be fine if you are between 55 and 59 half—you can always withdraw now or wait until 59, which in my honest opinion is better.
But if you plan on working for another 20 years or more, an early withdrawal could cost you dearly in future earnings and taxes. In addition, any loan taken against an account will still have to be paid back with interest—so an earlier distribution will often just delay payment for a short period of time. Always consult a Finance advisor or professional before making any real decision. You can also go to https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions for more detailed information.