Skip to main content

Rule of 55: how it works, with a calculator

The Rule of 55 lets you take money from the 401(k) or 403(b) of the job you leave without the 10% early withdrawal penalty. Below: how it works, which accounts it covers, and a free calculator, no signup, that shows whether you qualify, what it saves and what is left by 59½.

Short answer: Leave your job in or after the year you turn 55 (50 for public safety) and that employer’s 401(k) skips the 10% penalty. Income tax still applies, and IRAs are not covered.

Updated · By Berkay Kolay

How the Rule of 55 works

Withdrawals from a 401(k) or 403(b) before 59½ normally carry a 10% additional tax on top of income tax. One exception is separation from service: if you leave your employer in or after the calendar year you turn 55, payments from that employer’s plan are exempt from the 10%. It does not matter why you leave, whether you quit, retire or are laid off.

The test is the calendar year, not your age on the day you leave. Someone born in November 1971 who leaves in March 2026, at 54, qualifies, because they turn 55 during 2026.

Which accounts it covers

  • Covered: the 401(k), 403(b) or other qualified plan of the employer you leave. Money rolled into that plan from an old 401(k) before you leave is generally treated the same, if the plan accepts roll-ins.
  • Not covered: IRAs, including a rollover IRA, and plans from earlier employers you left before the year you turned 55.
  • Governmental 457(b) plans do not need the rule: they have no 10% penalty on withdrawals after you leave, at any age, except on money rolled in from other kinds of plans.

Plans decide how withdrawals work. Some allow any amount at any time; others allow only a single lump sum, which would push the whole balance into one tax year. Check the plan’s rules before you leave.

Public safety employees at 50

Qualified public safety employees, such as police officers, firefighters and emergency medical workers in a state or local government plan, can use the same exception from the year they turn 50, or after 25 years of service under the plan if that comes first. SECURE 2.0 extended it to more groups, including private-sector firefighters and state and local corrections officers.

The calculator

Rule of 55 appliesYesYou leave in the year you turn 56; the rule starts at 55
10% penalty avoided$16,000On $160,000 taken through 2029
Years before 59½4Through the year you turn 59
Left at the end of that time$426,728After withdrawals and growth

Leaving in the year you turn 56, you can take $40,000 a year from this employer’s plan without the 10% penalty, saving $16,000 before 59½. Income tax still applies, and the plan withholds 20% from each cash withdrawal.

Withdrawals year by year

Withdrawals and year-end balance through the year you turn 59
YearAge at year endWithdrawalYear-end balance
202656$40,000$483,000
202757$40,000$465,150
202858$40,000$446,408
202959$40,000$426,728

401(k) early withdrawal and penalty calculator

Cashing out a 401(k) before 59½ costs the 10% penalty, unless the Rule of 55 or another exception applies, plus ordinary income tax at your top rate. This 401(k) penalty calculator adds both: enter the amount and your other income to see the full cost and what you keep.

Federal income tax$3,750On top of your other income
State income tax$0Pick a state to include it
10% early withdrawal penalty$2,00010% of the withdrawal, before 59½
You keep$14,25028.7% goes to tax and the penalty

Taking $20,000 from a 401(k) at 50 with $60,000 of other income costs about $5,750: $3,750 of federal tax and a $2,000 penalty. You keep $14,250. The plan withholds 20% ($4,000) for federal tax when it pays you in cash; your tax return settles the difference.

Other exceptions to the 10% penalty on 401(k) withdrawals include 72(t) substantially equal payments, disability, medical costs above 7.5% of AGI, up to $5,000 after a birth or adoption, and one emergency withdrawal of up to $1,000 a year. A plan loan, where the plan offers one, avoids tax and the penalty if it is repaid on schedule. Some states add their own penalty, such as California’s 2.5%, which the calculator does not include.

Mistakes that cost the exception

  • Rolling the 401(k) into an IRA before 59½: IRA withdrawals do not get the exception.
  • Leaving in the year you turn 54 or earlier, then waiting until 55 to withdraw.
  • Counting on an older employer’s plan: only the plan of the job you leave at 55 or later is covered.

Retiring before 55? The Roth conversion ladder calculator shows the usual alternative, the FIRE calculator works out how much an early retirement needs, and the Barista FIRE calculator sizes the savings you need if part-time work covers some of the years before 59½.

Assumptions and sources

Withdrawals at the start of each year, with the rest growing at the return you enter. The calculator counts withdrawals through the year you turn 59, since you reach 59½ in that year or the next. Not tax advice: your plan’s own rules decide what you can take.

Figures checked on against IRS, exceptions to tax on early distributions and IRS Publication 575, Pension and Annuity Income.

Embed this calculator

You can put this calculator on your own blog, newsletter page or client site for free. Paste the code below where you want it to appear. It runs in your reader's browser and needs no account, no email and no API key. Please keep the credit line under it.

<iframe src="https://killionlabs.com/embed/rule-of-55/" title="Rule of 55 calculator" width="100%" height="700" style="border:0;max-width:760px" loading="lazy"></iframe>
<p><a href="https://killionlabs.com/calculators/rule-of-55/">Rule of 55 calculator</a> by Killion Labs</p>

Preview the embedded Rule of 55 calculator.

Frequently asked questions

What is the Rule of 55?
If you leave your job in or after the calendar year you turn 55, you can withdraw from that employer’s 401(k) or 403(b) without the 10% early withdrawal penalty. Income tax still applies.
Do I have to be 55 when I leave my job?
No, you have to leave in the calendar year you turn 55 or later. Leaving at 54 in the year you turn 55 qualifies; leaving at 53 and waiting until 55 to withdraw does not.
Does the Rule of 55 apply to IRAs?
No, only to the plan of the employer you left. Rolling that money into an IRA ends the exception for it, so leave what you need before 59½ in the plan.
Does the Rule of 55 apply to old 401(k)s?
No. It covers the plan of the employer you leave in or after the year you turn 55. Money left in an earlier employer’s plan does not qualify, though money rolled into the current plan before you leave generally does.
Is a Rule of 55 withdrawal taxed?
Yes, as ordinary income. The plan withholds 20% for federal tax on a cash distribution, and the actual tax is settled on your return. Only the 10% penalty is waived.
Is the Rule of 55 different for public safety workers?
Yes. Qualified public safety employees in a governmental plan, and private-sector firefighters, can use it from the year they turn 50, or after 25 years of service under the plan if that comes first.
How much tax will I pay on a 401(k) early withdrawal?
Ordinary income tax at your top rate, plus a 10% penalty before 59½ unless an exception such as the Rule of 55 applies. For a single filer with $60,000 of other income, a $20,000 withdrawal at 50 adds about $3,750 of federal tax and a $2,000 penalty, leaving about $14,250 before any state tax.
Does the 20% withholding cover the tax on a 401(k) cash-out?
Not always. The plan must withhold 20% for federal tax when it pays you in cash, but your real cost is your tax rate plus any 10% penalty, so you can owe more when you file. The withholding does not cover state tax.
Roth conversion ladder calculatorTry the live demoStart for free