Key Points
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A special rule gives you access to your 401(k) if you leave your job the year you turn 55 or later.
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Just because you’re allowed to tap your 401(k) doesn’t mean you should.
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Also, make sure to understand how the rule works so you don’t wind up penalized.
Being a seasoned employee won’t always protect you from layoffs. Sadly, in some cases, age could actually contribute to a layoff — even though that’s illegal.
If you’ve been laid off at age 55, you may be in a tough spot. You may not be ready to retire, but it can also be difficult to reinvent yourself at a new company, not to mention convince one to hire you.
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If you have a decent amount of retirement savings, you may be inclined to pick up some part-time work and cobble together an income between that and 401(k) withdrawals. And the good news is that while tapping a 401(k) plan at 55 would normally incur a 10% early withdrawal penalty, there’s an exception if you’re 55 or older.
But it’s important to know how that exception works. And it’s just as important to figure out whether you can afford to tap your long-term savings so soon.
How the rule of 55 works
Normally, raiding a traditional individual retirement account (IRA) or 401(k) before age 59 and 1/2 results in a 10% penalty. But if you separate from your employer, voluntarily or not, in the year you turn 55 or later, you can tap that company’s 401(k) without a penalty.
You’ll still pay taxes on withdrawals in that situation. But that’s no different than the taxes you’d pay if you were to tap a traditional 401(k) at a later age.
To be clear, though, this rule — often dubbed the rule of 55 — only applies to the 401(k) provided by your most recent employer. If you have an old 401(k) from a previous employer or money in an IRA, those accounts will be subject to a 10% early withdrawal penalty if you take distributions before turning 59 and 1/2.
Should you tap your 401(k) at 55 after losing a job?
Age 55 is fairly young to retire. If you have a $4 million balance in your 401(k), you may be able to get away with taking withdrawals and living off of your savings for the rest of your life. If you have a $2 million balance, you may be able to get by if you take modest 401(k) withdrawals and supplement them with part-time work.
But if you’re 55 with, say, $800,000 in your 401(k), you probably want to leave that money alone a while longer (and, ideally, add to your balance via future contributions). However, if you don’t have emergency savings, and the only cash reserves you have are in your 401(k), then you may have no choice but to take withdrawals while you look for your next job. In that case, try to keep those withdrawals to a minimum.
A difficult situation with different solutions
Getting laid off at 55 can be a huge blow. The silver lining is that you may be able to use your 401(k) to tide yourself over or transition into retirement at that point without facing steep penalties.
But before you rush to raid that account, make sure you can afford to start tapping it so young. And don’t hesitate to explore a career pivot that allows you to keep working if that’s the best thing for you financially and emotionally.
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