You Might Be Ready To Retire Early One Day If You Follow This Retirement Rule

Early retirement is a dream for many, but achieving that goal can be hard. Depending on how early you want to retire, it can take years to plan and build up your savings to supplement income held in taxed-advantaged accounts due to costly tax penalties and the increased risk of an IRS audit triggered by early 401(k) distributions. Adding to the difficulty is the fact that early retirees also can't rely on Social Security benefits until the age of 62. However, the Rule of 55, which stems from a provision in the Internal Revenue Code (via Cornell Law School), may enable retirees to make early withdrawals without incurring high penalties.

Per the Internal Revenue Code, the Rule of 55 enables an individual to make withdrawals from their employer-sponsored retirement plans, such as a 401(k) or 403(b), before the age of 59½ (that's when penalty-free distributions from qualified retirement accounts can normally begin). The rule only comes into effect when an individual leaves their job, no matter if they were terminated, laid off, or left of their own accord, during or after the year in which they turn 55. By meeting that one requirement, they are eligible to tap into their retirement savings without incurring the 10% early withdrawals penalty, opening up the possibility for an early retirement.

Despite its allure, the Rule of 55 is a fairly limited provision. On top of only applying to employer-sponsored retirement accounts, it's important to know that not all employers offer plans with penalty-free withdrawals. So, before making a major decision — like quitting a job in hopes of early retirement — it's best to check with a plan administrator. Additionally, if you have multiple employer-sponsored retirement accounts, not all of them will be eligible for the Rule of 55. Only the account with your most recent employer will qualify for penalty-free withdrawals. Savings rolled over from a 401(k) to an IRA are also not eligible. That said, you can roll an IRA into your 401(k) while you're still working to get more out of the rule.

If you're serious about using the Rule of 55 to retire early, there are some other factors to consider before making the jump. To safely retire at 50, it's estimated that you would need more than $1 million in savings. Folks looking to leverage the Rule of 55 will probably need a similar amount to enjoy their golden years stress free. Quitting the workforce at the age of 55 also means that you will still be ineligible for Medicare and some senior discounts, so think twice about early retirement even if you can make these penalty-free withdrawals.