Rule of 55 affects 10% penalty only?

Submitted by ssel on Fri, 2022-08-05 19:24

The so-called “rule of 55” allows penalty-free early distributions from a 401k if the participant separated from the employer after age 55.

I’ve never seen any suggestion that this rule affects the age at which distributions become qualified, though. I’d like to confirm that there’s not some other rule I’ve just never seen mentioned. So with this set of facts:

– Roth plan holds $9000 of Roth contributions, $1000 of earnings, and nothing else.
– Roth plan has been funded for over 5 years.
– Participant separates from service at age 57 and withdraws $1000.

I know that there’s no 10% penalty on any part of the withdrawal — that’s the rule of 55. I’d like confirmation that this is still not a qualified distribution, since the participant is not yet 59 1/2, so the earnings withdrawn ($100 pro-rata) will still be subject to ordinary income tax.



Submitted by David Mertz on Fri, 2022-08-05 19:57

Correct.  The rule of 55 is only an exception to the 10% early-distribution penalty.  The age for Roth qualification is 59½.



Submitted by William Tuttle on Sun, 2022-08-07 03:33

  • This is why this so-called “Rule of 55”, is a minor pet peeve of mine.
  • There is no such thing as a Rule of 55. You will find no such phrase in the tax code, IRS regulations or guidance.
  • It is and only is one of the enumerated exceptions to the 72t 10% early withdrawal penalty.
  • I particulary dislike the comparison between the so-called “Rule of 55” and the even more ludicrous “Rule of 72t”. The latter is referring to SEPPs. What is ludicrous is that both age 55 and SEEP are enumerated exceptions in the same subsection 26 U.S. Code 26 Section 72(t)(2)(A).
  • Now I calmly climb down off my soap box.


Add new comment

Log in or register to post comments