Rule of 55.

In plain English

Normally, pulling from a 401(k) before 59 and a half triggers a 10% early-withdrawal penalty. The rule of 55 is an exception. If you separate from your job (quit, get laid off, or retire) in or after the calendar year you turn 55, you can take withdrawals from that employer's 401(k) without the penalty. You still owe regular income tax on the money. It only applies to the plan at the job you just left, not to old 401(k)s or IRAs, and it does not apply if you rolled the money into an IRA first. Certain public-safety workers in government plans qualify starting at age 50.

01Why it matters

It can bridge the income gap for someone who retires or loses a job in their late 50s, before the normal 59 and a half age, without the 10% penalty.

02The math, step by step

You are laid off at 56. The penalty would normally be 10% on early withdrawals, but because you left in a year after turning 55, you can pull from that employer's 401(k) penalty-free. You take $25,000 to cover expenses and owe only ordinary income tax on it, not the extra 10% penalty (per irs.gov), which would have been $2,500.

03What this is NOT

04Receipts

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