Tapping Your 401(k) at 55? You May Regret That
It's tempting to dip into your 401(k) at 55, which you can do without a penalty under some circumstances. But beware — you may rue that decision later.


If you plan to dip into your 401(k) at 55, you can do so without a hefty tax penalty in certain circumstances. But should you? A recent MassMutual survey found that the average age for Americans to retire is 62. But some workers opt to end their careers much sooner.
The benefits of retiring early are many. You can travel, be present for grandchildren, and enjoy your time without the constraints of a job.
But retiring early can pose challenges. First, it requires a certain level of savings. And even if you have the funds, there’s the question of whether you can access them without taking a financial hit.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Traditional IRAs and 401(k) plans offer big tax incentives, but they force savers to wait until age 59½ to take withdrawals. Tapping one of these plans early typically means facing a 10% early withdrawal penalty, which is incentive enough to leave that money alone, even if it means having to work longer.
There’s a special rule, however, that applies to 401(k) plans that may give you penalty-free access to your savings starting at age 55. But whether it’s a good idea to tap your 401(k) at 55 is a different story. Even with that rule, you may run into some hiccups.
Tap your 401(k) at 55? Your savings have limited flexibility
In the context of 401(k) plans, there’s a concept known as the rule of 55. It allows you to tap a 401(k) without penalty if you separate from the employer sponsoring that plan during the calendar year in which you turn 55 or later.
Being able to access your 401(k) at 55 without penalty might seem like a great solution to your early retirement plans. But there are some pitfalls you might encounter.
First, this rule only applies to the 401(k) plan sponsored by the company you’re separating from at 55 or later. It doesn’t apply to old 401(k)s or funds in an IRA.
So, say you’re sitting on $3 million in retirement savings at 55, $2.7 million of that is in an IRA and $300,000 is in your most current 401(k). At 55, if you were to leave the job sponsoring your 401(k), you’d get penalty-free access to only about one-tenth of your total savings. Whether that’s enough to cover your expenses until age 59½ depends on you.
The other issue is that when you retire at 55, your money generally needs to last longer than if you retire in your 60s. By removing funds from your 401(k) at 55, you lose out on valuable years of compounding in that account.
Also, remember that while the rule of 55 gives you penalty-free access to your 401(k), it doesn’t eliminate taxes on your withdrawals. Those could be substantial during your first year of withdrawals in particular.
Say you turn 55 this year and work for a good part of it. You could take a 401(k) withdrawal without a penalty before the year is up. But that, combined with your work-related income, could push you into a higher tax bracket than you want to land in.
Think twice before retiring in your mid-50s
You may have options for accessing your retirement savings at 55. But you should know that retiring in your mid-50s is a potentially risky move, even if you have a nice amount of money saved up at that point.
For one thing, at 55, you’re a minimum of seven years shy of being able to collect Social Security. That could put a lot of pressure on your savings.
You’re also, generally speaking, a solid 10 years away from being eligible for Medicare, which means you’ll need to pay to put health coverage in place. The high cost of healthcare is apt to eat into your savings and lead to larger withdrawals.
Before you retire at 55, think carefully about why that’s appealing to you. If you have specific plans that a job might impede, like traveling, you may want to talk to your employer about taking a sabbatical rather than retiring outright. That could afford you the opportunity to travel while your health is still optimal, without having to live off of your 401(k) right away.
If your desire to retire at 55 stems from burnout, you may want to consider a career shift into less stressful work. Or, talk to your employer about transitioning to a part-time work schedule.
These aren’t options you have to explore. And it may be that you’ve saved enough to retire at 55 without worry. But if you have concerns, it’s worth looking at alternatives that allow you to keep earning a paycheck a bit longer while giving your savings extra time to grow.
Read More
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Maurie Backman is a freelance contributor to Kiplinger. She has over a decade of experience writing about financial topics, including retirement, investing, Social Security, and real estate. She has written for USA Today, U.S. News & World Report, and Bankrate. She studied creative writing and finance at Binghamton University and merged the two disciplines to help empower consumers to make smart financial planning decisions.
-
Key to Financial Peace of Mind: Think 'What's Next?' Rather Than 'What If?'
Even if you've hit your magic number for retirement, it's hard to stop worrying about money. Giving it a clear purpose is one way to reduce financial anxiety.
-
Three Estate Planning Documents a Business Owner Can't Afford to Skip
A business owner's estate plan should protect the company and its employees as well as the entrepreneur's heirs. These three documents are critical.
-
Key to Financial Peace of Mind: Think 'What's Next?' Rather Than 'What If?'
Even if you've hit your magic number for retirement, it's hard to stop worrying about money. Giving it a clear purpose is one way to reduce financial anxiety.
-
Three Estate Planning Documents a Business Owner Can't Afford to Skip
A business owner's estate plan should protect the company and its employees as well as the entrepreneur's heirs. These three documents are critical.
-
Mom Needs a Nursing Home. Should I Spend Down Her Assets So She Qualifies for Medicaid?
We asked expert financial advisers for their advice.
-
Financial Fact vs Fiction: Why Your 'Magic Number' Isn't Actually Magical
Do you think you're diversified if you're invested in the S&P 500 and Nasdaq? Do you think your tax rate will fall in retirement? Think again — and read on for other myths that could be leading you astray.
-
Opportunity Zones: An Expert Guide to the Changes in the One Big Beautiful Bill
The law makes opportunity zones permanent, creates enhanced tax benefits for rural investments and opens up new strategies for investors to combine community development with significant tax advantages.
-
Five Ways Retirees Can Keep Perspective Through Market Jitters
Market volatility is a recurring event with historical precedents (the dot-com bubble, global financial crisis and pandemic), each followed by recovery. Here's how people who are near or in retirement can navigate economic uncertainty.
-
California, South Florida, Long Island, New Jersey: The Places People Are Leaving in Droves in 2025
Skyrocketing costs and shifting priorities mean people are packing up and leaving some cities and states in droves, while others are flocking to more affordable or lifestyle-friendly destinations.
-
Average 401(k) Match: Do You Work for a Generous Company?
Here is the average 401(k) match and the top 20 companies as measured by their match policies. A generous 401(k) match provides a more secure retirement.