Everything About the 401(k) Withdrawal Age

LAST REVIEWED Dec 13 2019
8 MIN READEditorial Policy

What Is the Rule of 55? What You Need to Know About 401(k) Withdrawal Age

You may be able to withdraw funds from your 401(k) retirement savings account before you reach the age of 59 1/2, but there is typically a 10% penalty for doing so. However, there are some exceptions to the early distribution rule. One of these exceptions to the 401(k) withdrawal age, which is often referred to as the “rule of 55,” is applicable to those who are 55 years of age and older.

The Rule of 55 Explained

The “rule of 55” allows you to withdraw from your 401(k) without penalty. It allows any employee who quits during or after the year of their 55th birthday through the age of 59 1/2, or who are fired or laid of during this period, to withdraw money from their 401(k) or 403(b) retirement savings plans without paying a penalty.

The rule of 55 only applies to assets in your account at the most recent job that you leave. You are not eligible for this exemption if you would like to withdraw from a 403(b) and 401(k) account with a former employer.

However, if you want to get access to these assets without having to pay a penalty before the age of 59 1/2 under the rule of 55, you can roll assets from an account at your previous employer over to your current 401(k) prior to retirement.

Another Option: Section 72(t) Distribution

The Substantially Equal Periodic Payment (SEPP) exemption, or an IRS Section 72(t) distribution, also allows you to make a withdrawal from your 401(k), 403(b), or IRA retirement account if you leave your employment before the age of 59 1/2. Under this distribution rule, you are able to calculate your life expectancy and then calculate five equal payments for five years in a row.

Deciding Whether You Should Take Either Distribution

While withdrawing money early from a retirement account can be a critical safety net, it usually makes more sense to hold off and find another full or part-time job instead. Allowing your tax-deferred account to grow until you reach retirement is likely to be more lucrative.

Taking funds from your account early could decrease the value of your account in the long run.

Consider timing before you commit to making a withdrawal from your portfolio. For example, you might strategically make withdrawals during a low-income tax year can help you to reduce taxes on your retirement plan. Your financial planner or tax advisor can help you make strategic withdrawal decisions.

When Can I Withdraw Funds from My 401(k) Without Penalties?

At the age of 70 1/2, your required minimum distributions start. In other words, you must start making withdrawals from tax-deferred retirement plans, such as 401(k)s and IRAs.

You may receive an exception on these mandatory distributions from your plan if you still work for the company that manages your 401(k). If you are still working at the age of 70 1/2 and are not an owner of the company or own less than a 5% share, check with your plan administrator to see if you can receive an exception.

The 401(k) Age-Related Rules: At What Age Can You Start Withdrawing from Your 401(k)?

Some 401(k) plans allow for withdrawals before the age of 55 if you qualify for a hardship withdrawal.

It’s All About Decumulation Planning

Decumulation planning is a specific type of financial planning that helps retirees earn more income from their retirement by strategically timing their drawdowns.

You may qualify for a hardship withdrawal from your 401(k) account to follow these expenses: funeral costs, expenses related to repairing a primary residence, preventing foreclosure or eviction, or qualified higher education expenses.

Take Out a 401(k) Loan

You can also take out a loan against your 401(k) balance. The maximum amount you can borrow is half of your vested balance, or $50,000, whichever is lower. Interest rates on these loans are usually a few points higher than the prime rate. Typically, this type of loan must be repaid within five years. However, the term for repayment can be as long as 15 years in some cases.

There are several benefits to taking out a loan on your 401(k) account: 

  • You are not required to pay taxes on the loan amount.

  • You end up paying the interest as well as the principal back into your own account.

  • You are not required to undergo a credit check before obtaining this kind of loan.

  • The loan is not included on your credit report.

There are also certain drawbacks to taking out a 401(k) loan. If you leave your current job that hosts your 401(k) account, the term limits can drop drastically, to within 60 or 90 days. If you do not pay the loan back within this timeframe, you can face IRS penalties. You must also currently be employed by the company that administers your 401(k) in order to secure a 401(k) loan.

Roth IRA Hardship Withdrawals

Of all potential retirement accounts, your Roth IRA is the one you should consider tapping into first if you are planning to make a withdrawal. Because contributions are taxed before they go into your Roth IRA account, you will not need to pay taxes on the amount you withdraw. In fact, you can make a withdrawal from a Roth IRA at any time without paying a penalty.

You may not withdraw investment earnings from a retirement account unless you are 59 1/2 years of age or older and your account has been open for at least five years. If you meet both of these requirements, you can make qualified hardship withdrawals from a Roth IRA without paying taxes on the amount.

If you are a small or medium-sized business looking for a low-cost 401(k) for your employees, check out Human Interest. Human Interest provides accessible, affordable, easy 401(k) plans alongside a dedicated account management team to provide additional support. Get started on investing in your employees’ financial futures by scheduling a time to chat with our team today.

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers.

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