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Understanding the Rule of 55: A Guide by O1ne Mortgage

The Rule of 55 is an IRS provision that allows certain workers to access their 401(k) savings without incurring a penalty after age 55. To utilize this rule, you must leave or lose your job during the year you turn 55 or later, and it only applies to your most recent workplace’s plan.

Pros and Cons of the Rule of 55

Before considering the Rule of 55 for early retirement, it’s crucial to weigh its advantages and disadvantages.

Advantages

• No 10% Penalty: If you qualify, you can access your retirement savings before age 59½ without triggering a penalty.
• New Job Flexibility: You can continue to take distributions even if you get a new job after leaving your previous one.
• Lower Required Minimum Distributions (RMDs): Early withdrawals can help spread out distributions, potentially lowering your taxes.

Disadvantages

• Limited to Current Employer’s Plan: The rule only applies to your most recent employer’s 401(k), 403(a), or 403(b) plan.
• Reduced Savings Growth: Early withdrawals can decrease the overall value of your portfolio.
• No Social Security Yet: Relying on savings before Social Security benefits start at age 62 can deplete your reserves faster.

How to Use the Rule of 55 to Retire Early

To use the Rule of 55 for early retirement, follow these steps:

1. Leave Your Job at Age 55 or Later

You must leave your job the year you turn 55 or later to qualify for penalty-free withdrawals.

2. Withdraw From Your Current 401(k) Only

The rule applies only to the 401(k), 403(a), or 403(b) plan from your most recent job. Consider rolling over funds from previous plans into your current one, but consult with a tax advisor first.

3. Work With a Financial Advisor

Consulting a financial advisor can help you weigh your options and strategize your withdrawals to minimize tax obligations and ensure your savings last.

Other 401(k) Early Withdrawal Exceptions

Besides the Rule of 55, the IRS allows penalty-free early withdrawals for financial hardships, such as medical expenses, foreclosure risk, burial expenses, permanent disability, or natural disasters.

The Bottom Line

If you’re 55 or older, you may qualify for penalty-free distributions from your 401(k), 403(a), or 403(b) using the Rule of 55. However, it might be beneficial to let your savings grow longer. For personalized retirement planning and advice on 401(k) distributions, contact a financial advisor.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial future with confidence.

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