There are many struggling with their finances, especially in this “K” recovery. Here’s one way you can get money out of your 401(k) even if you’re not 59 1/2. Karl Eggerss explains the rule of 55 on CBS.
Sharon Ko: If you need extra money to pay for a major expense, there’s one way to pull from your retirement account and avoid an IRS fine. Usually if you withdraw from your 401k before 59 and a half, you get slapped with a 10% penalty. But check this out. The Rule of 55 says, if you leave a job in the calendar year you turn 55 or later you can take out money from your retirement account without the penalty. Doesn’t matter if you were laid off, fired or quit.
Karl Eggerss: And you still will pay income tax, you just don’t have the penalty. But the big caveat is, does your employer’s plan participate? Do they have that as an option in the plan? So a lot of 401ks can be customized.
Sharon Ko: Also, this rule only applies to your most recent gig.
Karl Eggerss: You can’t necessarily be 54 years old and then go back when you’re 55 and say, now I’d like to do the Rule of 55. You had to have been 55 when you left the company.
Sharon Ko: If you can find a different way to get extra money to pay for what you need, financial advisor Karl Eggerss says, go that route.
Karl Eggerss: If you start taking money out at 55 years old and your life expectancy is 85 or 90, is that 401k going to last for that 40 years? And so you really do need to try to defer as long as possible taking money out of your 401k.