SAN ANTONIO — If you’re in need of extra money for a major expense or maybe looking to retire early, here’s one way to pull from your retirement account and avoid an early withdrawal penalty.
If you withdraw out of your 401(k) before you’re 59-and-a-half years old, the IRS will slap you with a 10% early withdrawal penalty. But a regulation set by the IRS allows you to avoid that fine.
The Rule of 55 states if you leave a job in the calendar year you turn 55 or later, you can take out money from your retirement account without facing an IRS penalty. If you’re a public safety worker, you can withdraw without a penalty in the year you turn 50.
This rule applies if you’ve been laid off, fired or quit.
“You will still pay income tax; you just don’t have the penalty. But the big caveat is: Does your employer’s plan participate? Do they have that as an option in the plan?” said Karl Eggerss, senior wealth advisor and partner of Covenant.
The Rule of 55 allows you to gain access to your 401(k) from your most recent job. You cannot access retirement plans from previous employers. This rule doesn’t apply to individual retirement accounts, either. Eggerss recommends that you find alternative ways to pay for an expense and let your retirement account grow.
“Another option might be perhaps living off of a joint account. In other words, a non-retirement account in the meantime to fill that gap between now and until you turn 59-and-a-half,” Eggerss said. “If you start taking money out at 55 years old and your life expectancy is 85 or 90, is that 401(k) going to last, you know, for those 40 years? You really do need to try to defer as long as possible from taking money out of your 401(k).”