Retire Early with the Rule of 55 | How It Works + What People Get Wrong

About this video

• Video Title: Retire Early with the Rule of 55 | How It Works + What People Get Wrong
• Channel: Erin Talks Money
• Speakers: Erin (implied from channel name and monologue)
• Duration: 00:15:09

Overview

This video explains the IRS Rule of 55, a provision that allows individuals to access funds from their current employer's 401(k) or 403(b) penalty-free once they leave their job in the calendar year they turn 55 or later. The video covers eligibility criteria, tax implications for traditional and Roth accounts, and crucial pitfalls to avoid when utilizing this rule for early retirement.

Key takeaways

• Rule of 55 Explained: Allows penalty-free withdrawals from your most recent employer's 401(k) or 403(b) if you leave your job in the year you turn 55 or later (age 50 for public safety workers).
• Eligibility Criteria: Must leave your job at age 55+, the rule applies only to your most recent employer's plan, funds must remain in the employer's plan (not rolled into an IRA), and your plan must permit these distributions.
• Tax Implications: Traditional 401(k) withdrawals are taxed as ordinary income. Roth 401(k) withdrawals of contributions are tax-free, but earnings may be taxed and penalized if the 5-year rule isn't met or if under 59.5.
• Common Pitfalls: Rolling over to an IRA disqualifies funds from the Rule of 55, plans may not allow Rule of 55 distributions, large withdrawals can increase tax brackets and affect Social Security/Medicare premiums, and overlooking healthcare costs before Medicare eligibility.
• Strategic Advice: Always check your specific plan rules, delay rollovers until necessary, be cautious with Roth 401(k) rollovers to IRAs, spread out withdrawals, budget for taxes and healthcare, and consider building other income streams. Consulting a professional is highly recommended.