The Rule of 55: How Amazon Employees Can Retire Early
Amazon's 401(k) plan allows for penalty-free distributions under the rule of 55. As an Amazon employee, this could be your key to early retirement.
Key Takeaways
The rule of 55 allows Amazon employees to access their 401(k) funds penalty-free if they leave the company at age 55 or later.
This IRS provision makes early retirement more practical for many employees.
While the 10% early withdrawal penalty is waived, distributions are still subject to ordinary income tax.
What Is the Rule of 55?
The rule of 55 is an IRS provision that allows employees to make penalty-free withdrawals from their 401(k) after turning 55. Normally, accessing retirement funds before age 59½ triggers a 10% penalty. Under the rule of 55, this penalty is waived as long as you meet certain criteria.
Rule of 55 Requirements
The rule of 55 is a great opportunity for Amazon employees, though a few rules still apply:
Timing of separation: You must leave your job at Amazon in or after the calendar year in which you turn 55. This applies whether you resign voluntarily, are laid off, or are terminated.
Current employer plan only: The rule of 55 applies only to the 401(k) plan of your most recent employer (in this case, Amazon). Other retirement accounts from previous employers or IRAs are not eligible unless they have been rolled into your Amazon 401(k).
No rollovers: Once you roll the money into an IRA or another plan, you lose the rule of 55 protection. The funds must remain in Amazon's 401(k) plan administered by Fidelity to qualify.
Still subject to income tax: While the 10% penalty is waived, tax-deferred distributions are still subject to ordinary income tax.
How the Rule of 55 Helps Amazon Employees
Bridge to Early Retirement
The primary benefit of Amazon’s rule of 55 is the possibility of early retirement. Under standard 401(k) rules, retiring before age 59½ can be a challenge. The rule of 55 makes it possible for Amazon employees to retire several years earlier without risking a financial gap.
Phased Retirement
To access your Amazon 401(k) funds under the rule of 55, you only need to leave Amazon in the year you turn 55 or later. There’s no requirement that you remain unemployed. If you aren’t ready to fully retire, this could give you the freedom to pursue a different career, perhaps in a less demanding (or even part-time) role.
Response to Unexpected Job Loss
Even if you had no plans to leave Amazon on your own, the rule of 55 can be a big help. If you face a layoff or termination after age 55, you can use your 401(k) funds to support yourself while you find your footing again.
Meet Clients Who Chose Retirement
From worker to world traveler, snowboarder, and mountain biker!
The Rule of 55 and Early Retirement: Possible Risks
While the rule of 55 offers flexibility, it's not always the best strategy. Consider these potential drawbacks before reaching into your Amazon 401(k).
Long-Term Growth Impact
Any funds taken from your Amazon 401(k) will no longer benefit from the plan’s tax-advantaged growth. This could reduce your total retirement savings significantly over time. In some cases, it may be wiser to leave your 401(k) alone until later.
Tax Bracket Concerns
Even with the early withdrawal penalty waived, distributions still count as income on your tax return. Large withdrawals could push you into a higher tax bracket, resulting in a larger tax bill.
Reduced Savings
By retiring early, you will lose the opportunity to make additional contributions to your Amazon 401(k). Because this later stage of your career is likely a time of peak earnings, you could end up missing out on major savings potential, especially with Amazon’s employer match (and catch-up contributions available after turning 50).
Loss of Employer Benefits
Retiring early means losing access to a variety of Amazon’s other benefits, including:
Health insurance
Restricted stock unit (RSU) grants
Replacing these benefits independently can be costly and may strain your retirement budget.
Limited Access to Other Retirement Accounts
The rule of 55 applies only to the 401(k) plan of the employer you are leaving. Funds in IRAs or previous employers' plans are not accessible under this rule unless rolled into your current employer's plan before separation.
Alternatives to the Rule of 55
If the rule of 55 doesn't fit your situation, consider these alternatives.
Substantially Equal Periodic Payments (SEPP/Rule 72[t])
The SEPP allows penalty-free withdrawals from retirement accounts at any age. However, you will have to take substantially equal periodic payments based on your life expectancy for at least five years or until age 59½, whichever is longer. Once you start SEPP, you can’t modify the payment amount without penalties.
Roth IRA Contributions
You can withdraw Roth IRA contributions (but not earnings) at any time without penalty, making them a flexible source of early retirement funds. Investing in Roth accounts can leave more options for accessing your wealth in retirement.
Taxable Bridge Accounts
Taxable bridge accounts are non-retirement investment accounts you use to cover your expenses during the gap between early retirement and age 59½. These are effectively financial bridges that get you from early retirement to traditional retirement age. For Amazon employees, selling vested RSUs is a common way to fund these bridge accounts.
HSA for Healthcare Expenses
If you have a health savings account (HSA), you can use these funds penalty-free for qualified medical expenses at any age.
Meet Clients Who Chose Retirement
Setting a retirement date isn’t easy, but it’s a lot easier with a Fiduciary and a plan.
How to Access Your 401(k) Funds Using the Rule of 55
If you decide to use the rule of 55 as part of your retirement strategy, here are the steps you would take.
1. Double-Check Your Eligibility
Determine if your plans for early retirement align with the rule of 55 requirements. Remember, you must leave Amazon in or after the year you turn 55.
2. Calculate Retirement Income Needs
Calculate how much income you'll need in retirement and how much you can get from other sources. Is withdrawing from your Amazon 401(k) necessary? If it is, will you have enough to sustain you through retirement?
3. Consult with Amazon's 401(k) Administrator
Contact Fidelity to understand specific plan rules and distribution options available under Amazon's plan.
4. Work with a Fiduciary Financial Advisor
Partner with a fiduciary financial advisor who has experience with Amazon employees and early retirement strategies. A fiduciary advisor is legally obligated to put your interests first and can help you navigate the complexities of early retirement.
5. Develop a Withdrawal Strategy
Work with your financial advisor to plan 401(k) withdrawals to minimize tax impact while meeting your income needs. Coordinate your 401(k) funds with RSU sales, investment income, and eventual Social Security benefits.
6. Decide on Healthcare Coverage
Plan for healthcare costs between early retirement and Medicare eligibility at age 65. This can be a substantial expense in retirement.
7. Create a Long-term Plan
Develop a strategy that transitions from rule of 55 withdrawals to more diversified withdrawals across accounts after age 59½.
Get Help from the TrueWealth Team
Navigating the rule of 55 and planning an early retirement from Amazon requires specialized knowledge of both IRS regulations and Amazon's specific benefits. At TrueWealth Financial Partners, we offer:
Amazon-specific advice: Our advisors understand the nuances of Amazon's compensation structure, 401(k) plan, and RSU program.
Comprehensive retirement planning: We will help you integrate your rule of 55 withdrawals into a broader retirement strategy that considers all aspects of your financial life.
Ongoing support: As your needs evolve, we will adjust your strategy to ensure the best results year after year.
Ready to explore early retirement from Amazon? Schedule a free consultation with one of our fiduciary financial advisors, and we’ll be happy to give you all the insights and answers you need.
FAQs
Can I use the rule of 55 for my Amazon 401(k) if I've already rolled over previous employer plans into it?
Yes, all funds in your current Amazon 401(k) are eligible, regardless of whether they were rolled in from previous employer plans. However, once you leave Amazon, you should not roll these funds to an IRA if you want to maintain eligibility for the rule of 55.
What happens if I leave Amazon before age 55? Can I still take penalty-free withdrawals at 55?
No, you must separate from service in or after the year you turn 55 to qualify. If you retire before then, you'll need to wait until 59½ or use an alternative strategy like SEPP/Rule 72(t).
Can I continue working part-time after using the rule of 55?
Yes, you can work elsewhere after leaving Amazon and still take penalty-free withdrawals. Your employment status after leaving Amazon doesn't affect your rule of 55 eligibility.
Does the rule of 55 apply to mega backdoor Roth contributions within my Amazon 401(k)?
Yes, all funds in your Amazon 401(k) plan are potentially eligible for rule of 55 distributions, including after-tax contributions converted to Roth. However, earnings on Roth contributions will be taxable if you're under 59½ and the account is less than five years old.
Will using the rule of 55 affect my ability to contribute to a new employer's 401(k) if I work elsewhere?
No, using the rule of 55 for your Amazon 401(k) doesn't affect your ability to contribute to a new employer's plan. You can still take distributions from your old plan while contributing to a new one.
How does the rule of 55 affect RMDs?
You'll still need to take required minimum distributions (RMDs) from tax-deferred 401(k) funds starting at age 73 (or age 72 if you turned 72 before January 1, 2023). The rule of 55 simply allows earlier access without penalties; it doesn't change other retirement account rules. (Roth funds are exempt from RMDs.)
Does the rule of 55 apply to my unvested employer match in my Amazon 401(k)?
No, you can only withdraw vested balances. If you leave Amazon before completing three years of service, you'll forfeit any unvested employer match amounts.
Meet Clients Who Chose Retirement
Retiring at 55 takes a special strategy.