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Retiring early? Make sure you understand this rule before rolling over your 401k.
Should you roll your 401k into an IRA when you retire early? Maybe. But if you're retiring before 59½, make sure you understand the Rule of 55 before making that decision. Missing this could end up costing you a 10% penalty. Most people assume rolling a 401k into an IRA is just the next step when they retire. And in a lot of cases, it can make a lot of sense. But there's a rule that changes the math completely if you're leaving your job between 55 and 59½. You really want to understand this before moving any money. It's called the Rule of 55. And it can provide you early, penalty free access to your account. Here’s how it works. If you separate from your employer in the calendar year you turn 55 or later, you can pull money from that 401k with no 10% early withdrawal penalty. No waiting until 59½. This is super helpful if you need to start withdrawing money to fund the first couple years of your early retirement. But the moment you roll that money into an IRA, that penalty free access is gone. Example: We had a client retire at 57 who wanted to consolidate everything into one IRA account. Totally reasonable. But he also needed income for the first couple years of retirement. Rolling his current employer 401k over would have cost him penalty-free access to around $800,000 for those first two and a half years. So we left that 401k in tact, used it for the income he needed, and then rolled it over once he hit 59½ to take advantage of some additional investment options and management. Important note. The Rule of 55 only applies to money in your current employer's 401k plan, not IRAs and not old 401ks from previous jobs. (although there is an interesting planning tip you might be able to take advantage of with your old 401ks). If you're in your 50s and considering early retirement, let's talk before anything moves. The rollover can always happen later. You can't undo it once it's done. Link in bio. Everyone’s tax situation is different. Work with an advisor or CPA to make sure these strategies work for your individual situation. #retirementplanning #401k #earlyretirement #financialplanning #ruleof55 #retirementtips #HNW #rollovers
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