Timing is Everything

Although a lot of us may try to forget our age as the years go by, when it comes to reaping the financial rewards of getting older, we are wise to keep certain age-related milestones top of mind. But as might be expected for the rules and regulations surrounding retirement withdrawals and government benefits, it can get complicated. Therefore, it is important to understand what you need to do — and when — to help assure you do not make a costly mistake and that you get all the economic benefits to which you are entitled.

Here is a checklist of milestones based on your age:

  • UP TO AGE 50: The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is currently $20,500. You may contribute a maximum of $6,000 into either a Traditional IRA or Roth IRA.
  • AGE 50: At the half-century mark, future retirees get some extra help in saving for retirement. They can make what are called “catch-up” contributions to both 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan. The current catch-up contribution for employer sponsored retirement plans is $6,500. For Traditional IRAs and Roth IRAs, the catch-up contribution currently stands at $1,000.
  • AGE 55: If you have assets in an employer-sponsored qualified retirement plan such as a 401(k) and leave your job (called separation of service), you can take a distribution without paying the 10 percent penalty for early withdrawal. You will, however, pay income taxes on the money.
  • AGE 59½: At this age, you can take distributions from your qualified retirement plan or traditional IRA without penalty. You will pay income taxes on the distributions taken from the retirement account. In the event here was after-tax contributions into your retirement account, you only pay taxes on the gains, not the contribution. If you have a Roth IRA and have held it for five years, you can withdraw these earnings both penalty-free and tax-free.
  • AGE 60: If you are a widow or widower, you are eligible to begin survivor benefits from your deceased spouse’s Social Security record. Since you will begin the payments prior to your full retirement age, there will be a reduction in the benefits received. These benefits are also subject to earnings limitations if you are currently employed. In order to find out what your survivor benefits are you will need to apply for the benefit. Applying for the benefit does not require you to actually receive the benefit so you can change your mind and continue to postpone receipt until a later age.
  • AGE 62: This is the earliest date you can begin taking Social Security benefits (unless you are disabled), but realize that if you do, your payout will be permanently reduced by approximately 25 percent. (And if you are still working and earn beyond a certain limit, benefits are further reduced on a temporary basis.) So before you decide to take Social Security at this age, consider how much more you could make over time by waiting.
  • AGE 65: You are eligible for Medicare — a very significant milestone considering the high cost of health insurance and medical care. If you are already receiving Social Security, you are automatically enrolled in Parts A and B – there is nothing you need to do. If you are not receiving Social Security benefits, you can apply for both Social Security and Medicare at the same time. However, if you prefer to delay Social Security, you can apply for Medicare alone — ideally, three months before the month you turn 65. You can enroll for Medicare online, in person or by phone. (Note: You can choose to delay Part B coverage if you are covered by an employer plan.) Also note that once you are on Medicare, you are no longer able to make contributions to a Health Savings Account.
  • AGES 66-67: Depending your birth year, this is when you reach what the Social Security Administration calls your “full retirement age,” or the time that you can begin receiving your full, unreduced benefits. It is important to note, however, that if you delay receiving Social Security beyond your FRA, your benefits will continue to increase by 8% annually until you reach age 70. When you are ready to apply, you can apply in-person or online at www.SSA.gov.
  • AGE 70: As mentioned above, Social Security benefits do not increase beyond this age, so if you have not done so already, file for your benefits now.
  • AGE 72: This is the age when you are required to begin taking money from tax-advantaged retirement plans such as a Traditional IRA, 401(k), Roth 401(k) 403(b), SEP, SIMPLE or 457 plan. The minimum you must withdraw — your Required Minimum Distribution or RMD — is determined by a formula based on life expectancy and the amount you have in tax-advantaged accounts as of the last day of the prior year. Your tax professional can help you determine your RMD. You absolutely must take your first RMD by April 1st of the year after you turn 72 or face a hefty 50 percent PENALTY! And if you wait until that date, you must then take your second RMD by December 31st of that same year. So it is really important to pay attention to this deadline. On the plus side, you do not have to take an RMD from a 401(k) if you are still working, and never from a Roth IRA.

Being mindful of age-related dates and deadlines is only part of the picture. You also need to sit down and review your overall financial picture — retirement accounts, Social Security benefits, other sources of income — and create a retirement budget and withdrawal strategy. It is not only about missing something, it is about taking every opportunity to secure your financial future.

Please contact your Hunt Valley Wealth Advisor if you have any questions.