Rule of 55 clarification

Forum|Forum|2 years ago
January 28, 2024
1 reply
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The statement reads "separation from service the years during or after age 55". "During" not "be". Why doesn't the rule simply state separate from at the age of 55 or older (similar to how 59 1/2 rule states)?

How the exception reads leads me to believe it applies to people who are 54 years at separation as long as later in the same calendar year (on or before December 31st of the year in which they separate) they turn 55 years old.

Lets say I was born in December of 1968. Lets also say in January of 2023 I separate from service at the age of 54 years old. Does the Rule of 55 apply? I believe it does, as later in the year, which would be during the same year I will turn 55.

Would this be a correct application of the rule?

AnnetteB6

Level 15

No, that would not be a correct application of the rule.

Based on information published by the IRS, the exception to the early distribution penalty associated with separation of service and the age of 55, you must be 55 before the separation occurs.

Here is a link to the IRS site that outlines the early distribution penalty exceptions:

Topic no. 558, Additional tax on early distributions from retirement plans other than IRAs

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marcttAuthor

Level 2

Thank you for your response. Thank you for the link.

Follow on question/further clarification: If I separate at the age of 54 but delay taking any withdrawals until after I have attained the age 55 would the Rule of 55 apply? Basically, does age 55 apply to when the separation occurred and when the withdrawal(s) are taken or only to when the withdrawal(s) occurred?

I am expecting that age 55 applies to both, but as before, I would appreciate an expert opinion.

Thanks.

marcttAuthor

Level 2

The only way that the age-55 exception would apply when you separated from service at age 54 from the employer providing the plan would be if you reached age 55 later that same calendar year.

in reply to dmertz:

That would be the situation: Separate from service in January of 2025 at the age of 54 years old. In November of the same year (2025) I will turn 55 years and start taking withdrawals.

Your post/reply is how I understood it to be. Unfortunately, two Tax Experts state otherwise in earlier replies to my original post.

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions

The key word is "during". TurboTax even asks you when you are doing taxes "Separation From Service the Year During or After Age 55". Not Separation From Service on or After the Age 55.

I don't mind paying my taxes. I just don't want to pay more than I am supposed to. I might have to schedule some time with a CPA/Tax Attorney or try to reach out to the IRS.

Thank you for the reply.