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Retiring early? Be careful before rolling over your 401k. Here's what to know about the Rule of 55.
Should I roll over my 401(k) after leaving my job? Maybe. But if you’re retiring before age 59½, don’t automatically roll it into an IRA. You could accidentally give up an important early-retirement option. It’s called the Rule of 55. If you leave your employer during or after the calendar year you turn 55, you may be able to take withdrawals directly from that employer’s 401(k) without the normal 10% early-withdrawal penalty. You’ll still owe ordinary income taxes on taxable withdrawals, but avoiding that additional 10% penalty can make a big difference if you need access to the money before 59½. The problem is what happens when you immediately roll that 401(k) into an IRA. The Rule of 55 generally doesn’t apply to IRAs. So a rollover that seems like a routine financial decision could eliminate one of the ways you planned to fund the first few years of an early retirement. That doesn’t mean you should never roll over an old 401(k). There can be plenty of good reasons to do it. It just means the timing of that rollover matters. Before moving the money, look at your age, when you left the employer, what other accounts you have available, and how you plan to fund the years before 59½. A rollover can always happen later. Make sure you understand what you may be giving up before you do it. Want to learn more about whether you should roll over your 401(k)? Click the link in our bio.
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