Your Money
Most people know that retirement-account withdrawals before age 59½ can trigger an additional 10% federal tax. Far fewer know about an exception commonly called the Rule of 55.
Leave your job during or after the calendar year in which you turn 55, and you may be able to withdraw money from that employer’s 401(k) or 403(b) without the additional 10% tax. You do not even have to wait until your 55th birthday.
The catch is that the exception generally applies only to the plan connected to the employer you just left. Roll that money into an IRA, and the Rule of 55 no longer follows it. Withdrawals are still subject to ordinary income tax, and each employer plan can set its own rules about installments, partial withdrawals or lump-sum distributions.
That creates a planning opportunity for someone retiring between 55 and 59½. An old workplace account might provide a useful income bridge before Social Security, pensions or unrestricted IRA withdrawals begin.
At PRESERVE Wealth Management, these are exactly the kinds of details we want to surface before a retirement decision is made. When we model retirement income, taxes and account sequencing, we can identify whether keeping money in a former employer plan creates a useful bridge. The goal is not simply to consolidate accounts. It is to make sure each account is positioned to support the larger plan.
The Retirement Tax Break That Most People Overlook
by Anne Tergesen
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