Pretirement Using the Rule of 55: Access the Stash before Age 59 1/2

One little-known worm-hole in the financial universe is The Rule of 55.  It only applies to certain workplace retirement plans, like 401ks, 403bs and the Thrift Savings Account. The rule does not apply to IRAs or Roth IRAs.  It does not even apply to every single 401k plan and their equivalents.  You have to research your own employer’s plan’s rules to see if it’s in the fine print.  I have done that research for my wife’s plan and mine, which required calling the fund companies that administer our work place plans.  I did not find our in-house Benefits staff knowledgeable about it.  Thanks to my research, low and behold, The Rule of 55 applies to both of our plans, meaning that we can access our workplace retirement funds for pretirement in the year in which we turn 55 or later – if we separate from employment.

If you’re a saver, you probably have a lot of your funds squirreled away in IRAs, a 401k, 403b or another tax-advantaged account.  If you have been contributing throughout your career, these funds likely comprise a large part of your nest egg.  There might be enough in your 401k to pay off your mortgage, buy the nicest BMW, or a second home. For cash!

Of course, you’re not going to do those things with your hard-won “retirement accounts”, because they are intended to support you later in life.  For that reason and to incentivize your own protection, the retirement account rules are that you generally need to be aged 59 1/2 to access those funds without incurring a large 10% penalty, in addition to the usual income taxes.  Not many portfolios are large enough to withstand that kind of assault.

However, there are various little-publicized yet legal caveats that allow an investor to access those funds earlier, if needed or wanted, without the 10% penalty.   Different plans allow for loans and they have provisions for educational or emergency purposes. There is also a method called the 72t Rule, which allows a person to tap his or her IRA before age 59 1/2 using “substantially equal periodic payments.”   Others have hacked the Traditional and Roth IRA rules so that they can withdraw the funds that they deposited five years earlier or more, using a “Backdoor Roth”.

If any of those financial gymnastics appeal to you, you can Google around to learn about them.  I have used none of them, because they seem complicated and, regardless, I’m not here to provide anyone any financial advice whatsoever.  Though I have an avid appreciation for the benefits of smart personal finance, you should know that I was a history major in college.  Technically, I was an economic history major but that still does not qualify me to give you financial advice.

What I can tell you is what we’ve done in our family, which is to access our stash earlier than 59 1/2 so that we can lean on it as a third leg of the stool along with our two careers.

One little-known worm-hole in the financial universe is The Rule of 55.  It only applies to certain workplace retirement plans, like 401ks, 403bs and the Thrift Savings Account. The rule does not apply to IRAs or Roth IRAs.  It does not even apply to every single 401k plan and their equivalents.  You have to research your own employer’s plan’s rules to see if it’s in the fine print.  I have done that research for my wife’s plan and mine, which required calling the fund companies that administer our work place plans.  I did not find our in-house Benefits staff knowledgeable about it.  Thanks to my research, low and behold, The Rule of 55 applies to both of our plans, meaning that we can access our workplace retirement funds for pretirement in the year in which we turn 55 or later – if we separate from employment.

Let’s break down that last critical, guiding phrase into two components.

To access our workplace retirement funds penalty-free, we must have reached the calendar year in which we turn 55.  In other words, we can be 54! Happily, like me, my wife has been an avid saver, maximizing her pre-tax retirement account savings for years, enjoying the large benefits of tax-deferral, her employer match and the “catch-up provision” that allows a saver to save even more starting at age 50.  Also happily, she’s a little older than me.  So, when she decided to step down from her last position for a needed break at age 54 she qualified for The Rule of 55, because her 55th birthday was coming soon in that same calendar year.  Since her separation from employment, she’s been making withdrawals from her own retirement fund, penalty-free, to support her enjoyable sabbatical.  Regular income taxes will still be due, just as if she was working.

As we joke about, I’m a mere pup at 52. I, too, will qualify for The Rule of 55 with my employer’s plan only 14 months from now.  How?  Thanks to my parents, my birthday is very late in the calendar year, meaning that the calendar year in which I turn 55 will begin just after I’ve turned 54, so I get nearly a twelve month head start on The Rule of 55.  Thank you Mom and Dad!

The big catch is, of course, I would need to leave my employer, which I am not ready to do.  I’m enjoying my work and my salary and am still in full Benjamin-stacking mode.  Still, the peace of mind of knowing that my wife and I don’t have to wait until 59 1/2 to pretire, assuming the rest of our Vanguard plan checks out, as it does, is huge comfort for us.  My wife is taking a pretirement break while I work, because we choose to.

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