401k 55 rule?

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So you must be working when you turn 55 to withdraw penalty free? What if you stop working at 50, live off other savings, investment accounts…go get a job at 49, transfer your 401k into their plan, and quit after turning 50? I’m really regretting investing so much when I was younger in my 401k if I can’t touch it even tho there’s plenty in there to retire at 50. I swear it’s the goal of every financial advisor to ensure you continue working and supporting them.

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My dad retired for 90 days at 54 after taking a package from BP. Went back to work because most of his money was in a 401k and now he’s going to work his consulting job for another 2 years until he hits 65. He’s the one who mentioned to me I better open a Roth and have other investments outside of my 401k.

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I swear it’s the goal of every financial advisor to ensure you continue working and supporting them.

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When you apologize publicly for your stupid comment I'll help.

Once both of my kids get out of daycare, I'm starting a Roth and putting all that same money in it. If I want to retire at 50 I can live off the Roth until 55 assuming my outstanding debts are all paid off by then.

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I guess worst case scenario you can eat the 10% penalty if it won’t make a difference in your overall needs. Would really suck to do so.

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It depends on the scenario. For myself, I'd be paying 24% marginal tax on anything that I put into a Roth. In my retirement I'll be at the marginal rate of 12% but the effective rate of 8-9%. A 10% penalty would still keep my tax rate lower than putting it into a Roth in a scenario like the OP.

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second rule, you must be working for the employer when you turn 55.

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I thought is was "in the year you turn 55"?

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Once both of my kids get out of daycare, I'm starting a Roth and putting all that same money in it. If I want to retire at 50 I can live off the Roth until 55 assuming my outstanding debts are all paid off by then.

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Man starting young is key to a Roth. I wish I would have started in my 20’s instead of my mid to late 30’s. $6500 then $7000 a year takes a while to build up any real money. I’ll jump to the catchup when I hit 50 but I think it only raises it by $1000.

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first rule of rule of 55: Your employer's 401k plan MUST HAVE that option enabled on their plan! If the 401k plan does not have the option enabled, then you cannot use it.

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From what I've read, the rule of 55 is an IRS provision that applies to all 401k plans.

What is specific to each 401k plan is if it allows partial distributions. Some plans don't allow partial distributions and would require you to withdrawal the entire balance. In that case, the rule of 55 wouldn't be useful for most people.

Living off Roth contributions in early retirement isn't usually ideal.
1. they get depleted quickly (growth can't even tapped early without tax & penalty).
2. Roth is a valuable planning asset for future tax optimization and best left to grow & withdraw later or pass tax free to heirs.
3. Deliberate use of partial Roth draws to top off income/pay 1 times large expenses is useful to manage ACA subsidies in early retirement, minimize IRMAA during Medicare yrs, minimize tax on SS etc...
This is why you ideally want a mix of assets in various tax buckets so you can fully utilize deductions, low brackets, zero LTCG rate, and ACA subsidy etc.

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I thought is was "in the year you turn 55"?

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Correct. Even if your Birthday is December 31st, you can use the rule of 55 as early as January 1st in the same year when you are only 54 years old. Even though you are 54 for almost an entire year, since you turn 55 in the calendar year, you can use the rule of 55 if it applies to your situation.

Penalty-free when retiring…in the year you turn 55

The key clause.