Most Americans know they can’t start withdrawing from their workplace 401(k) or 403(b) until age 59½ — at least not without triggering a 10% early withdrawal penalty.

But many don’t know of an exception to that rule that allows you to withdraw as early as age 55 without triggering a penalty (1).

Robert Kiyosaki says this 1 asset will surge 400% in a year and begs investors not to miss this ‘explosion’

Millionaires under 43 hold only 25% of their wealth in stocks. Surprised? Here’s where their money is actually going

Jeff Bezos backs a platform that lets anyone invest in rental homes for as little as $100 — here are 5 ways to build wealth like a landlord without actually being one

If you leave your job in the calendar year that you turn 55 — voluntarily or not — this tax break could help to fund an early retirement.

“Knowing I could access that money penalty-free has made a huge difference,” Jon Barker, a retired teacher in Seattle, told The Wall Street Journal. Without it, he says he wouldn’t have been able to take early retirement. And though he still had to pay taxes on his 403(b) withdrawals, he avoided the early withdrawal penalty (2).

It’s called the Rule of 55 — and you could be missing out if you don’t know about it. So, for example, if you leave your job and roll over your 401(k) into an individual retirement account (IRA), it would be too late to take advantage of this tax break.

But the Rule of 55 isn’t the right move for everyone. Nor is it a‘magic early retirement tool. Here’s what you need to know.

The Rule of 55 allows you to make penalty-free withdrawals from your most recent employer’s 401(k) or 403(b) when you leave that job — whether you choose to leave or you’re laid off — in the year you turn 55 or later. This only applies to your current job, not workplace retirement plans from previous employers.

While you avoid the early withdrawal penalty, you still have to pay income tax on any funds withdrawn from the account. The Rule of 55 also applies to Roth 401(k)s, but the five-year rule for qualified withdrawals is still in play. That means you must have held your account for at least five years before you can take tax-free withdrawals.

However, the Rule of 55 doesn’t apply to IRAs or rollovers. “Rollover IRAs from 401(k)s are not included in this rule and withdrawals could incur a penalty,” Michael Rusinak, vice president of Fidelity Financial Solutions, writes in a Fidelity blog (3).

Still, considering that some Americans retire earlier than expected, it’s useful to know about this rule.

Many Americans plan to stay in the workforce longer to build up their retirement savings. Yet a significant number (42%) of retired Americans say they retired earlier than originally planned, often due to circumstances beyond their control, such as health issues (30%) and unexpected job loss (21%), according to the 2026 Annual Retirement Study from the Allianz Center for the Future of Retirement (4).

Yet, not everyone knows about the Rule of 55 and takes advantage of it.

According to Alight data (as reported by The Wall Street Journal), in 2024 about 10% of workers left their jobs between the ages of 55 and 59½. Yet less than one-third took advantage of the Rule of 55 (2).

Read More: Robert Kiyosaki has a grim warning for baby boomers. This is what he recommends to protect your wealth

Not all employer plans are the same. While some allow for partial withdrawals, others require you to withdraw the entire account balance at once. In the latter case, you could end up with a massive tax bill.

Before making any moves, talk to your plan administrator about whether partial withdrawals are allowed on your workplace plan under the Rule of 55.

If you take partial withdrawals, you can continue taking those withdrawals even if you get another job (and start saving in another workplace retirement plan). This provides some flexibility if you’ve been laid off and are actively looking for work or if you’re choosing to ease into retirement by transitioning to part-time work.

If your employer plan requires you to withdraw the account balance in full under the Rule of 55, one option is to withdraw only what you need and then roll the rest into an IRA.

Keep in mind that taking advantage of the Rule of 55 could impact your retirement savings over the long-term, since you’ll lose out on compounding growth and are withdrawing funds sooner than you originally planned. It could also increase your tax liability, depending on your personal circumstances and withdrawal strategy.

Also consider that with early retirement, you’re not eligible for Medicare until age 65, so you’ll need to find another health insurance option to fill in the gap (such as coverage through the ACA Marketplace or a spouse’s employer plan).

Most financial experts recommend having multiple sources of retirement income, including personal savings, workplace retirement plans and non-retirement brokerage accounts, in addition to Social Security and any pensions or annuities.

It could be worth consulting a qualified financial advisor about your options and whether the Rule of 55 is the best move for you.

Dave Ramsey warns this is America's most common retirement mistake — here's what it is and how to fix it ASAP

Insurance companies profit most from drivers who auto-renew without shopping around. Comparing 100+ quotes takes 2 minutes and costs nothing

The new tax breaks in Trump's 'big beautiful bill' expire after 2028 — and financial experts say most people won't act in time. Here's what to do before the window closes

The average American overpays for at least one of these 5 monthly bills they never think to question. Which of these are draining your budget?

Join 250,000+ readers and get Moneywise’s best stories and exclusive interviews first — clear insights curated and delivered weekly. Subscribe now.

We rely only on vetted sources and credible third-party reporting. For details, see our ethics and guidelines.

Internal Revenue Service (1); The Wall Street Journal (2); Fidelity (3); Allianz Life (4)

This article originally appeared on Moneywise.com under the title: The Rule of 55 lets you tap your 401(k) penalty-free before 59½ — but less than a third of eligible workers use it

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.