Chapter 2: The Rule of 55
The worksheets from Chapter 2 of Fifty-Five. Type your own numbers, or try an example from the book to see how each one works.
The 10% additional tax
What an early withdrawal costs you on top of income tax, when no exception applies. It is also what the Rule of 55 saves you when it does apply.
The formula: Withdrawal amount × 0.10 = The 10% additional tax
The calculator needs JavaScript. The paper worksheet below does not: it is the same arithmetic, written out.
The paper worksheet
Your withdrawal $__________ × 0.10 = The 10% additional tax $__________
Walk through it, step by step
- Write the amount you plan to take out on the first blank.
- Write it again with the decimal point showing, like $40,000.00.
- Move the decimal point one place to the left. Or, on a calculator: type the amount, press ×, type 0.10, press =.
- Write the result on the second blank. That is the 10% additional tax.
- Now ask: does an exception apply? If the money comes from the plan of the employer you left in or after the year you turned 55, the Rule of 55 applies and this tax is $0.
Check your answer
- Multiply your answer by 10. You should get back your withdrawal.
- Remember, this tax comes on top of regular income tax. It is not the whole bill.
Figures this worksheet uses, and where they come from: The 10% additional tax on early distributions (IRS, Retirement Topics: Exceptions to Tax on Early Distributions).
How much to ask for
How much to request from a workplace plan so the check covers what you need after 20% is held back for federal income tax.
The formula: Amount you need ÷ 0.80 = Amount to request
The calculator needs JavaScript. The paper worksheet below does not: it is the same arithmetic, written out.
The paper worksheet
Amount you need $__________ ÷ 0.80 = Amount to request $__________
Walk through it, step by step
- Decide how much you need in hand, after withholding. Write it on the first blank.
- On a calculator: type that number, press ÷, type 0.80, press =. Or on paper: divide it by 4, then multiply that answer by 5.
- If the answer has cents, round up to the next whole dollar so you don't come up short.
- Write the result on the second blank. That is how much to request.
- Subtract the first blank from the second. That is how much the plan will send to the IRS for you.
- If your state also withholds tax, ask the plan for the total withholding rate. Then divide by what is left instead of 0.80. For example, if 25% is withheld in total, divide by 0.75.
Check your answer
- Multiply the amount to request by 0.80. You should get back the amount you need.
- The same multiplication tells you what a check will be. A $40,000 request with 20% held back pays $32,000.
Figures this worksheet uses, and where they come from: 20% mandatory federal withholding on eligible rollover distributions paid to you (IRS, Rollovers of Retirement Plan and IRA Distributions).