Sep 17, 2020
The rule of 55 lets you tap into your 401(k) early without paying a penalty, but only if you meet the age requirement and other terms
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Punch Shot: Who wins U.S. Open at Winged Foot? And who doesnt? 27 Fall Activities to Add to Your Bucket List The rule of 55 lets you tap into your 401(k) early without paying a penalty, but only if you meet the age requirement and other terms © vgajic/Getty Images The rule of 55 can help middle-aged 401(k) account-holders plan early retirement.vgajic/Getty Images
- The rule of 55 is an IRS provision that allows those 55 or older to withdraw from their 401(k) early without penalty.
- The exception may apply to those who are leaving their employer, either voluntarily or involuntarily.
- The rule of 55 only applies to your current workplace retirement plan and doesn’t spare you from paying regular income tax on the withdrawal.
- Visit Insider's Investing Reference library for more stories.
It's easy enough to contribute to a 401(k) or 403(b) plan. But getting your money back out of these workplace retirement accounts can be more difficult. Unless you're at least 59½ years old, it usually triggers taxes and penalties.
But those who have reached the age of 55 have a special option to access their funds penalty-free. This "rule of 55" could save serious money if you want to retire early or need to make a one-time withdrawal from your plan to cover a major expense.What is the rule of 55?
To discourage the use of retirement plan funds for non-retirement expenses, the IRS normally doesn't allow you to withdraw from your 401(k) early — "early" being defined as before age 59½.
If you do, you're dinged with income taxes — an automatic 20% of the amount you take out — plus an additional 10% tax penalty.
But the IRS makes an exception for the middle-aged. It spares you the 10% penalty if you have parted ways with your employer and are over 55 years old. If you're a public safety worker (police or corrections officer, fire fighter, EMS responder), you can be as young as 50.
The rule of 55, as it's colloquially known, can apply whether you quit your job voluntarily or are fired. But the departure must happen after you reach the appropriate age. So if you retired at age 54, you wouldn't be eligible for the rule of 55, even after your 55th birthday.
Bear in mind that the rule of 55 does not remove your income tax obligations on your 401(k) withdrawals — only the 10% penalty. With a traditional 401(k), that means you owe tax on any amount you take out. With a Roth 401(k), that means any earnings generated by the account, if you've held it for less than five years.Limits of the rule of 55
Of course, the IRS never makes anything simple. Here are key limitations to keep in mind with the rule of 55 and your eligibility:
- It has to be a 401(k). One common misunderstanding with the rule of 55 is that it applies to all retirement accounts. But, in fact, IRAs are not eligible for this exception.
- It only works with your current 401(k). So any money sitting in an account from an old job isn't covered by the rule of 55.
- It may not apply to your 401(k). While employers can allow early distributions (IRS-speak for withdrawals) to departing 55-year-old employees, they are not obligated to do so. So it's crucial to ask your company's 401(k) plan administrator if early withdrawals, and hence the rule of 55, are allowed.
The rule of 55 could be a deciding factor for those who are considering early retirement. It also helps if you've been unexpectedly downsized, and need a sizable sum right away: to cover medical bills, or pay off your mortgage early. While it's usually advisable to keep money in your plan as long as possible, there can be times when tapping it makes financial sense.
As mentioned previously, IRAs and 401(k)s from previous employers are not eligible for the rule of 55 exception. However, the money in these other qualified retirement accounts can become eligible by rolling them into your current 401(k).
This is a big deal as it could help you access a much larger savings pool before age 59½. Of course, since only active employees can do rollovers, you'd have to square all this away before you leave the job. And check with your employer to see if it allows rollovers into its 401(k) plan (not all do).
In any case, you should consider the timing of your withdrawal. Taking it in the year that you retire will increase your taxable income and could bump you into a higher tax bracket. So waiting to make your first withdrawal until at least the next January after your job exit could save you money on your tax bill.Alternatives to rule of 55 withdrawals
If you don't meet the eligibility requirements for the rule of 55, or even if you do, there may be other ways to avoid the 10% penalty.
One option would be to set up a Substantially Equal Periodic Payments (SEPP) plan. You can establish one of these plans at any age. But you must agree to receive equal payments for at least five years or until age 59½ (whichever is later).
Second option: See if you qualify for another IRS exception because you've become disabled or are dividing assets in a divorce. Other hardship distributions apply to home expenses, medical expenses, and other dire financial needs.
Finally, under the CARES Act, the IRS is allowing anyone up to $100,000 of penalty-free coronavirus-related withdrawals until December 31, 2020.The financial takeaway
Just because the rule of 55 makes penalty-free withdrawals possible, it doesn't necessarily mean you should rush to tap your 401(k). The longer your money is invested, the more time you give your investments to grow tax-deferred, and for compound interest to work in your favor.
But you may ultimately decide that an early 401(k) withdrawal is the right move for your situation. And by taking advantage of the rule of 55, you can send more of those withdrawals to your own pocket and less to the IRS.Related Coverage in Investing:The worst thing you can do with your 401(k) when you leave a job, according to a financial expert and bestselling authorA 401(k) can be the most lucrative way to save for retirement, so take advantage if you canIf you work for a nonprofit, church, or public school, a 403(b) plan is a great way to save for retirementHow to withdraw from your traditional 401(k) account early — the strategies to avoid penalties and feesHere's exactly how to figure out when you can retireRead the original article on Business Insider
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Report: William Barr Receiving Catholic Award Angers Some Who Oppose DOJ Renewing Death Penalty for Child Murderers
U.S. Attorney General William Barr is set to receive the Christifideles Laici Award award from the National Catholic Prayer Breakfast on Wednesday, a development that has riled Catholics who object to the Trump administration’s renewing the federal death penalty after it has been dormant for almost two decades.
The DOJ made the announcement about the death penalty in July 2019 to address “the most horrific crimes:”
Attorney General William P. Barr has directed the Federal Bureau of Prisons (BOP) to adopt a proposed Addendum to the Federal Execution Protocol—clearing the way for the federal government to resume capital punishment after a nearly two decade lapse, and bringing justice to victims of the most horrific crimes. The Attorney General has further directed the Acting Director of the BOP, Hugh Hurwitz, to schedule the executions of five death-row inmates convicted of murdering, and in some cases torturing and raping, the most vulnerable in our society—children and the elderly.
“Congress has expressly authorized the death penalty through legislation adopted by the people’s representatives in both houses of Congress and signed by the President,” Attorney General Barr said. “Under Administrations of both parties, the Department of Justice has sought the death penalty against the worst criminals, including these five murderers, each of whom was convicted by a jury of his peers after a full and fair proceeding. The Justice Department upholds the rule of law—and we owe it to the victims and their families to carry forward the sentence imposed by our justice system.”
The San Francisco Chronicle reported on what it said is the objection to Barr getting the award:
Outraged at Barr’s decision to reinstate the federal death penalty after a 17-year pause, they are using the occasion of the award to emphasize the church’s teaching on the death penalty — that it is wrong and should never be used — and to highlight what they say is Barr’s flagrant violation of Catholic doctrine.
The keynote speaker at Wednesday’s virtual award ceremony is the Auxiliary Bishop of Los Angeles, Robert Barron, an influential Church official. He often appears on cable news and is “one of the world’s most followed Catholics on social media,” according to his personal website, with more than 50 million YouTube views and 3 million Facebook followers.
Barron’s participation in the award ceremony has drawn the ire of death penalty foes, as the award becomes part of a larger battle over capital punishment in America and the church’s proper role in that fight.
“It’s a big stink, frankly,” Nancy Haydt, a California defense attorney who grew up Catholic and directs Death Penalty Focus, a nonprofit based in Sacramento working to end capital punishment, said in the Chronicle report. “It’s a big blowup within the Catholic Church.”
The Archdiocese of Santa Fe issued a news release that called on the award not be given to Barr.
“Let us not become the evil we despise,” the news release said.
“Last year, after Pope Francis ordered a change in the church’s catechism to call the death penalty morally ‘inadmissible,’ U.S. bishops supported his move by a vote of 194 to 8,” the Chronicle reported.
But the DOJ laid out the brutal facts of the five executions it oversaw:
- Daniel Lewis Lee, a member of a white supremacist group, murdered a family of three, including an eight-year-old girl. After robbing and shooting the victims with a stun gun, Lee covered their heads with plastic bags, sealed the bags with duct tape, weighed down each victim with rocks, and threw the family of three into the Illinois bayou. On May 4, 1999, a jury in the U.S. District Court for the Eastern District of Arkansas found Lee guilty of numerous offenses, including three counts of murder in aid of racketeering, and he was sentenced to death. Lee’s execution is scheduled to occur on Dec. 9, 2019.
- Lezmond Mitchell stabbed to death a 63-year-old grandmother and forced her nine-year-old granddaughter to sit beside her lifeless body for a 30 to 40-mile drive. Mitchell then slit the girl’s throat twice, crushed her head with 20-pound rocks, and severed and buried both victims’ heads and hands. On May 8, 2003, a jury in the U.S. District Court for the District of Arizona found Mitchell guilty of numerous offenses, including first degree murder, felony murder, and carjacking resulting in murder, and he was sentenced to death. Mitchell’s execution is scheduled to occur on Dec. 11, 2019.
- Wesley Ira Purkey violently raped and murdered a 16-year-old girl, and then dismembered, burned, and dumped the young girl’s body in a septic pond. He also was convicted in state court for using a claw hammer to bludgeon to death an 80-year-old woman who suffered from polio and walked with a cane. On Nov. 5, 2003, a jury in the U.S. District Court for the Western District of Missouri found Purkey guilty of kidnapping a child resulting in the child’s death, and he was sentenced to death. Purkey’s execution is scheduled to occur on Dec. 13, 2019.
- Alfred Bourgeois physically and emotionally tortured, sexually molested, and then beat to death his two-and-a-half-year-old daughter. On March 16, 2004, a jury in the U.S. District Court for the Southern District of Texas found Bourgeois guilty of multiple offenses, including murder, and he was sentenced to death. Bourgeois’ execution is scheduled to occur on Jan. 13, 2020.
- Dustin Lee Honken shot and killed five people—two men who planned to testify against him and a single, working mother and her ten-year-old and six-year-old daughters. On Oct. 14, 2004, a jury in the U.S. District Court for the Northern District of Iowa found Honken guilty of numerous offenses, including five counts of murder during the course of a continuing criminal enterprise, and he was sentenced to death. Honken’s execution is scheduled to occur on Jan. 15, 2020.
The Christifideles Laici Award is given to a lay Catholic “for fidelity to the Church” and “exemplary selfless and steadfast service in the Lord’s vineyard,” according to the National Catholic Prayer Breakfast.
The DOJ has overseen five executions and is expected to approve two more.
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