ABOUT THE AUTHOR:
John Cooper, Senior Private Client Advisor
John is steeped in the Carolina tradition of helping one’s neighbor. As a Senior Private Client Advisor, he enjoys exercising his neighborly skills by listening to clients about their hopes, dreams, and aspirations to help them create a plan to achieve what is important to them.
I vividly recall the months leading up to my 50th birthday. I received some sage advice, and a few jokes, from family & friends (you know who you are!) about preparing for the milestone event.
Anyone who is 50 years or older can relate: Don’t let aging get you down, because it’s too hard to get back up! Don’t get too close to the birthday cake; you may catch fire. The list goes on! What they did not mention was how quickly 50 turns into 55. Hopefully, the Rule of 55 can help my fellow quinquagenarians (i.e. those age 50-59) bridge the treacherous waters between early retirement and social security benefits.
Let’s begin with the IRS 59 ½. The 59 ½ rule specifies that withdrawals from retirement accounts before this age are considered “early” and may trigger a penalty. The IRS-imposed penalty is 10% of the amount withdrawn before federal & state income taxes are withheld.
Example:
This year John Doe, age 56, just retired from a local healthcare provider. He decides to begin withdrawing $10,000/yr from his previous employer’s 401(k). Because he is younger than 59 ½, he will pay a $1,000 (10%) early withdrawal penalty each year until he reaches age 59 ½.
Can the Rule of 55 Help?
The answer is maybe. The Rule of 55 is an IRS provision allowing certain workers to withdraw from their employer-sponsored 401(k) or 403(b) accounts without the usual 10% early-withdrawal penalty (federal and state taxes still apply) provided they leave their job during the calendar year they turn 55 or older.
One caveat: This rule applies only to the retirement plan of your most recent employer—rollovers into IRAs or past-employer accounts do not qualify. It is worth noting that public safety workers—like police officers, firefighters, EMTs, and air-traffic controllers—can begin penalty-free withdrawals at age 50 under a similar provision. Prior to making a withdrawal, you must confirm with your plan administrator whether your plan permits Rule of 55 withdrawals. Also, not all plans allow partial withdrawals—some require a lump-sum withdrawal only, which can make taxation tricky.
You Must Follow the Rules
To follow the Rule of 55, you must separate from your employer (quit, retire, or be laid off) in or after the year you hit 55. Be aware that income taxes still apply to any withdrawals. Remember, this rule only waives the early withdrawal penalty. Fortunately, this can provide income while waiting for Social Security, pension, or other income sources. What happens if you find new employment later? You can continue withdrawals from the original employer’s plan, as long as that account remains intact and hasn’t been rolled over into an IRA.
Be Aware of Potential Issues
It is important to remember that large distributions may bump you into a higher tax bracket. I suggest you consult a tax professional prior to withdrawing large amounts. In addition, you may lose long-term investment growth by tapping into retirement funds early.
The Rule of 55 is a valuable early-access option for retirement funds when used correctly. Remember, a financial advisor can help discuss the best options for your situation. They can help you decide on the best approach and strategies for your lifestyle and retirement goals.
We are here to help, whether by answering a quick question or building an in-depth personalized financial plan. Reach out today!
John Cooper
Senior Private Client Advisor
A native of Greenwood, John offers expert guidance and support to families and individuals. He provides comprehensive wealth management services such as portfolio allocation, insurance analysis, and retirement planning.
After helping his clients identify their goals, John will put together a comprehensive financial plan, tailored to each client’s investment suitability, risk tolerance, time frame, and personality. It serves as a map to help clients reach their goals: to lower taxes, preserve and protect assets, create a qualified retirement plan, or leave a legacy behind.
First Published:
This article was originally published in the August 15, 2025 Edition of the Index Journal and has been republished with permission.
The information contained within has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy. The opinions expressed are subject to change from time to time and do not constitute a recommendation to purchase or sell any security nor to engage in any particular investment strategy. Investment Advisory Services are offered through Greenwood Capital Associates, LLC, an SEC-registered investment advisor.
Excerpts from or links to this article on the Greenwood Capital Insights page have been included in Greenwood Capital social media pages and distributed Greenwood Capital newsletter. As is the nature of social media, the general public is able to post comments and/or “likes” in response to these excerpts and/or links. These comments are unsolicited and are posted by either clients or non-clients, which could be interpreted as client testimonials or public endorsements, respectively, and no cash or non-cash compensation is provided. A conflict of interest could exist related to unsolicited posts as Greenwood Capital and its investment adviser representatives could indirectly benefit from these posts.
