Rule of 55! Highlights
Allows individuals who leave their job in or after the year they turn 55 to withdraw funds from their 401(k) or 403(b) without the typical 10% early withdrawal penalty. This can offer valuable financial flexibility for those planning early retirement or transitioning careers.
- It only applies to employer-sponsored retirement plans (401K/403b).
- It does not apply to IRAs, even if you rolled over money from your employer sponsored plan.
- It only applies to your latest employer 401k/403b plans, not a previous employer.
- Withdrawals must be made in the year that you turn 55 (or older) and leave your employer, either to retire early or for any other reason – even if you want to work somewhere else!
- If you leave your employer prior to turning age 55, the Rule of 55 is not an option, even after you turn 55
- The distributions do not have to be taken on any type of a schedule.
- Retirement plan distributions taken would still be subject to ordinary income tax.
Public service employees may have more flexibility. Firefighters, police officers and emergency medical technicians (EMTs) who have a 403(b) might have the option to begin taking withdrawals beginning at age 50, depending on their situation. Check with your company’s plan administrator to confirm that they offer these options.
Other circumstances outside of the Rule of 55 that may allow you to avoid that additional 10% penalty include:
- Total and permanent disability.
- Medical expenses that exceed 7.5% of your adjusted gross income.
- Withdrawals made because of an IRS levy plan.
- Qualified disaster distributions.
- Status as active duty and qualified reservist.
See Rule of 55 details for a complete list
Additional details from Fidelity
Rule 72 (t) Highlights!
Rule 72(t) allows for penalty-free withdrawals from your 401K, 403b and IRAs.
This rule allows you to benefit from your retirement savings at any age before age 59 1/2 through early withdrawals without the otherwise required 10% penalty, as long as certain qualifications are met.
To take advantage of this rule, you must:
- You must withdraw these funds according to a specific schedule.
- The IRS offers three different methods for calculating your specific withdrawal schedule. You must adhere to the payment schedule for five years or until you reach age 59 1/2, whichever comes later (unless you are disabled or die).
- Withdrawal schedule options:
-Required minimum distribution (RMD)
-Amortization
-Fixed annuity
- You can switch to the RMD method from either the amortization or the annuity factor method. This is a one-time irrevocable switch and you must use the RMD method for the remainder of the schedule.
- There are other IRS exemptions that can be used for medical expenses, purchasing a home, and more.
- If you do not stick to your 72(t) payment plan, or if you modify the payments, they will no longer qualify for the exemption from the 10% penalty. Also, the 10% will be reinstated retroactively to all the distributions you have taken prior to age 59½.
- An extra withdrawal is considered a modification of the payment schedule
Details - The Motley Fool
Roth IRA withdrawals:
Some key highlights
Utilizing ROTH IRA funds in early retirement is an option. There is wide-spread confusion with respect to the withdrawal rules:
- Since Roth IRA's are funded with after-tax dollars, you are able to withdraw your contributions at any age, regardless of when you made the contributions.
- Withdrawal of contributions have no tax consequences.
- You do not have to be 59 ½ to withdraw your contributions
- Withdrawal of earnings on Roth IRA's have additional requirements regarding penalties and taxes.
- Withdrawal of funds after a Roth conversion have additional requirements regarding penalties and taxes
Withdrawals of Roth IRA Earnings
The rules for withdrawing earnings (the growth from your Roth IRA contributions) are more complex. To withdraw earnings tax-free and penalty-free, you must meet two conditions:
- 5-Year Holding Period: Your Roth IRA must be open for at least 5 years from the first contribution or conversion.
- Age 59½ or Older: You must be at least 59½ years old when you withdraw earnings.
Withdrawals of Earnings Before Age 59½ or Before 5-Year Holding Period
- If you’re under 59½ and you withdraw earnings before the 5-year holding period is up, you will face:
- Income Tax on the earnings portion.
- Early Withdrawal Penalty of 10% on the earnings portion.
- Income Tax on the earnings portion.
- Exceptions to the early withdrawal penalty (but not the tax) might apply in certain situations, such as:
- Disability.
- First-time home purchase (up to $10,000).
- Qualified education expenses.
- Qualified health expenses.
- Substantially equal periodic payments (SEPP).
- Disability.
Ordering Rules for Withdrawals
If you make a withdrawal, the IRS has an ordering rule that determines whether you’re withdrawing contributions or earnings:
- First, you take out contributions (which are always tax- and penalty-free).
- Next, you withdraw conversion amounts (subject to the 5-year holding rule for conversions (see below).
- Last, any remaining funds come from earnings (which are subject to taxes and penalties unless you meet the 5-year and 59½ rules).
Example:
- Suppose you contributed $5,000 to your Roth IRA, it grew to $7,000, and you then took out $4,000.
- The first $5,000 will be considered a withdrawal of your contributions, which is tax- and penalty-free.
- The remaining $1,000 would be considered earnings, and if you're under 59½ and haven't met the 5-year rule, you'd owe taxes and possibly the 10% penalty on the $1,000.
Penalty-Free Early Withdrawals of Earnings in Certain Cases
Even if you're under 59½ and haven't met the 5-year holding period, there are some exceptions where you can withdraw earnings penalty-free (but still subject to tax):
First-time home purchase: You can withdraw up to $10,000 of earnings for a first-time home purchase.
Disability: If you become permanently disabled, you can withdraw earnings without penalty.
Higher education expenses: For qualified higher education expenses.
Medical expenses: If you have unreimbursed medical expenses that exceed 7.5% of your adjusted gross income.
Health insurance premiums: If you're unemployed for at least 12 weeks and need to pay health insurance premiums.
Substantially Equal Periodic Payments (SEPP): If you take withdrawals based on a structured plan, you can avoid the early withdrawal penalty.
Strategy to utilize Roth IRA funds on a temporary basis, which includes contributions and any cumulative earnings:
60-Day Rollover Rule (Once-Per-Year Rule)
- You can withdraw money from one IRA (including a Roth IRA) and deposit it into the same or another IRA within 60 days.
- You can only do one such rollover per 12-month period across all your IRAs, not per account.
- This rollover option may help to bridge a gap for up to 60 days, with the ability to continue tax-free growth
Roth IRA Conversion – 5-Year Rule
The key rule for Roth IRA conversions is the 5-year holding period. The IRS has two main time frames for this:
A. 5-Year Rule for Withdrawals of Converted Amounts
- When you convert funds from a Traditional IRA to a Roth IRA, you need to wait 5 years before you can withdraw the converted funds tax-free and penalty-free, even if you're over 59½.
- This rule applies separately for each conversion. For example, if you convert $10,000 in 2023, that conversion's 5-year clock starts then, and you’ll have to wait until 2028 to withdraw that amount without penalties.
B. 5-Year Rule for Qualified Distributions
- After 5 years, the funds in your Roth IRA, including conversions, can be withdrawn tax-free and penalty-free, as long as you’re age 59½ or older.
- If you’re under 59½, the converted amount can be withdrawn penalty-free but subject to tax unless you’ve met the 5-year requirement.
- Exceptions to penalties (like for a first-time home purchase or disability) don’t apply to Roth IRA conversion withdrawals — only to contributions.
HSA details and strategy
Flexibility
HSA funds can be used tax-free for qualified medical expenses at any time, even before retirement. The key is that the expense has to be a qualified medical expense as defined by the IRS.
Here are some common qualified medical expenses:
- Doctor visits, prescription medications, and surgeries
- Dental expenses, including cleanings and orthodontia (excluding cosmetic procedures)
- Vision care (glasses, contacts, LASIK surgery)
- Mental health care (therapy, counseling)
- Certain over-the-counter medications (prescribed)
- Long-term care insurance premiums (subject to limits)
As long as the expenses are qualified and you use the funds for them, there are no tax penalties, and the withdrawals are tax-free.
Non-Medical Expenses Before Age 65
If you withdraw HSA funds for non-medical expenses before age 65, the IRS will hit you with both:
- Ordinary income tax (on the amount withdrawn).
- A 10% penalty.
This is one of the main drawbacks of using an HSA for non-medical expenses before retirement.
Exceptions to the 10% Penalty
There are a few exceptions where you can use HSA funds for non-medical expenses without incurring the 10% penalty:
- Disability: If you're disabled, you can use HSA funds for non-medical expenses without the penalty (though you'll still pay ordinary income tax).
- Death: If you pass away, your beneficiaries can use the funds without penalties.
- Age 65+: After age 65, you can withdraw HSA funds for non-medical expenses without a penalty, though those withdrawals will be taxed as ordinary income (similar to a traditional IRA).
Strategic Use of HSA Funds Before Retirement
If you expect to have high medical expenses before retirement, you can use your HSA funds for these costs. However, if you don't need the funds right away, it may make more sense to let them grow tax-free to use for healthcare costs in retirement.
For example:
- If you're healthy and don’t need the funds: Let the HSA grow by investing the funds and using other means to pay for medical expenses.
- If you have significant medical expenses before 65: It's fine to use HSA funds, but keep in mind the 10% penalty on non-medical withdrawals.
The HSA is an amazing tool for tax-free growth if used correctly, and it's a good idea to keep it primarily for medical expenses both before and during retirement to maximize its potential.
IRS - HSA Details