Early retire at 55 with Separation from Service Exception - 401k withdrawals without penalty?

You're on the right track about the Rule of 55! This is a great provision for those planning early retirement. Here's what you need to know: The exception only applies to the 401k from the employer you're separating from at 55 or older. Any other 401ks from previous employers or IRA accounts would still be subject to the 10% early withdrawal penalty if you tap them before 59½. Make sure your separation is complete - you can't continue working part-time and use this exception. Also, your 401k plan must allow for this type of withdrawal - not all do, so check your plan documents or speak with your benefits department. One strategy some people use: roll older 401ks into your current employer plan before separating, if your plan allows it. This way more of your retirement savings becomes accessible penalty-free at 55.

After spending hours on hold with the IRS trying to figure out this exact issue for my own retirement, I finally found a better solution. I used https://taxr.ai to analyze my retirement accounts and confirm my eligibility for the Rule of 55 exception. The tool actually looked at my specific situation, reviewed my 401k plan documents, and showed me exactly how to structure my withdrawals to avoid penalties. What surprised me was learning about the specific distribution codes that need to appear on my 1099-R to avoid IRS flags. My plan administrator didn't even mention this important detail when I called them!

Just wanted to update everyone - I took the advice and tried https://taxr.ai to analyze my retirement accounts. I was actually wrong about my understanding of the Rule of 55. Turns out my 457 plan has completely different rules than my 401ks and I can access it penalty-free regardless of my age when I separate from service! The service created a custom withdrawal sequence showing me I should tap my 457 first, then my current employer 401k under the Rule of 55, and leave my old 401ks and IRAs until last when I hit 59½. This strategy will save me approximately $32,000 in early withdrawal penalties compared to what I was planning. Definitely worth checking out if you're trying to navigate early retirement.

If you're having trouble getting clear answers from your 401k administrator about the Rule of 55 (like I was), I highly recommend using https://claimyr.com to get through to the IRS directly. I was so frustrated trying to confirm whether my specific situation qualified, and my plan administrator kept giving me vague answers. Using Claimyr, I got connected to an actual IRS agent in about 20 minutes instead of the 3+ hours I spent on hold previously. The agent confirmed exactly how the Separation from Service exception works with my specific plan and even explained how the distribution would need to be coded on my tax forms. Check out their demo video here: https://youtu.be/_kiP6q8DX5c

Alright, I need to eat crow here. After posting my skeptical comment about Claimyr, I decided to try it myself since I've been trying to reach the IRS for weeks about my own Rule of 55 question. I'm honestly shocked - the service connected me to an IRS agent in 17 minutes when I'd previously wasted an entire day on hold. The agent clarified that my voluntary severance package still qualifies as a separation from service for the Rule of 55, and confirmed which distribution code my plan administrator should use. For anyone dealing with early retirement questions that HR and your plan administrator can't definitively answer, getting direct confirmation from the IRS is incredibly valuable. Saved me from potentially making a $27k mistake with early withdrawals.

Something nobody mentioned yet - even if you qualify for penalty-free withdrawals under the Rule of 55, you'll still owe REGULAR INCOME TAX on any distributions. At $45k/year, you should estimate around ~$5,400 in federal taxes depending on your other income sources and deductions. Also, while the 10% penalty is waived, these withdrawals still count as income which could impact your ACA healthcare subsidies if you're planning to use the marketplace for health insurance during early retirement.

Has anyone successfully done substantially equal periodic payments (SEPP/72t) alongside Rule of 55 withdrawals from different accounts? I've gotten conflicting advice about whether this is allowed.

Great question about the Rule of 55! I went through this exact situation two years ago when I left my job at 56. A few additional points that might help: First, make absolutely sure your plan allows in-service distributions after separation. Some plans require you to take a full lump sum, while others allow periodic withdrawals. Mine only allowed annual withdrawals, which affected my cash flow planning. Second, consider the tax implications carefully. Since you're planning $45k annually, you might want to spread larger withdrawals across December/January to manage which tax year they fall into, especially if you have other income sources. Also, document everything with your HR department before you leave. I wish I had gotten written confirmation of my separation date and eligibility - it would have saved me headaches later when filing taxes. One last tip: if your company offers a voluntary separation package, make sure the timing doesn't affect your Rule of 55 eligibility. Some packages technically keep you employed longer than you think. With $780k saved, you're in great shape for early retirement! Just make sure to have a solid plan for healthcare coverage - that was my biggest unexpected expense.

This is such valuable information! I'm actually in a similar situation - turning 55 next year and considering early retirement. One thing I want to add based on my research is about the timing of your separation. The key detail many people miss is that you must separate from service during or after the calendar year you turn 55. So if your birthday is in November 2025, you could technically leave in January 2025 and still qualify. But if you leave in December 2024 (before turning 55), you wouldn't qualify even though you're only a few weeks away from 55. Also, regarding your question about documentation from HR - while there's no specific IRS form required, I'd recommend getting a letter confirming your separation date and that it constitutes a complete termination of employment. This can be helpful if the IRS ever questions the distribution on your tax return. One more consideration: if your current employer allows it, you might want to look into whether you can roll any old 401(k)s into your current plan before you leave. This would make more of your retirement savings accessible under the Rule of 55, since it only applies to the plan you're separating from. Good luck with your early retirement planning - sounds like you're well prepared with that savings level!