Financial Milestone Ages

[dropcap1]W[/dropcap1]here birthday parties for three, four, and five-year-olds are what makes growing up seem so much fun, the sounds and excitement after age 50 mark different milestones.  And who would ever guess that the Internal Revenue Service (IRS) would create great opportunities for some of your birthdays, and mandate action at others.  Here’s a short list of some of the ages to make note of, so get ready to blow out some candles in celebration!


Age 50–Catch up contributions to retirement plans

So you’ve got a sore back, tired knees, and don’t have the stamina of a 30-year old.  If those are the worst things you’re suffering from, life probably isn’t so bad.  However, you’re probably making more than you ever have, you’re wiser, have a lot more confidence, and you still know how party in a way that might even “disturb the peace.”  But on this birthday, something special happens: the IRS allows you to sock away even more money for retirement!!  For an Individual Retirement Account (Roth or Traditional) in 2012, you can save an extra $1,000/year into your account.  For a defined contribution plan (i.e. 401k, 457, 403b, etc.) you’re allowed to put an extra $5,500/year (in 2012) into the retirement plan.  This “catch-up” provision can really help to pump up your account during the final earning years of your career.


Age 55–Can take distributions from 401k, 403b, or 457 plan if retired. **Some restrictions apply

Now that you have turned the same age as our previous national highway speed limit, some additional limitations are lifted.  For one, if you are retiring from a job where you had a 401k and you are 55 or older on the date of retirement, you are allowed to start withdrawing money from that account without incurring the 10% early withdrawal penalty.  The same rules apply to a 403b plan.  A 457 retirement plan (typically owned by government employees) can be accessed (without the 10% early withdrawal penalty) once the employee retires; and that can happen even earlier than age 55!  The catch here is that you must be fully retired from your last employer and be drawing money out of your retirement account (401k or 403b) that was sponsored by that employer.  If you rolled the money over to an IRA, you’d have to wait until you are 59 ½ to withdraw without incurring an early withdrawal penalty of 10%.


59 ½–Can withdraw from IRAs without penalty

Does anyone really keep track of their ½ year birthday?  Well you do if you’re half-way in between age 59 and 60 and you need access to your retirement account!  Age 59 ½ marks the earliest you can withdraw (for any reason) from any of your retirement accounts without incurring a 10% penalty. If the account is a Traditional IRA, SEP IRA, 401k, or any of the alphabet soup of qualified retirement accounts that you might have contributed to on a tax-deferred basis, you will have to pay ordinary income taxes on each withdrawal.  If the account is a Roth style IRA, 401k, or 403b, current law states that you will not owe any tax upon withdrawal. (Provided the account has been in place for at least 5-years.)


62–Can apply for Social Security Retirement benefits

OK…so this is a moving target, and there is no right or wrong decision.  If you are eligible to receive benefits (meaning you’ve qualified by working at least the minimum required 40-quarters), you can start your ‘life-time’ income of retirement benefits at age 62.  Keep in mind that if you start receiving benefits at age 62, you will be receiving the least amount of income (dollars per month) eligible to you.  Your “full” retirement age can be found at the Social Security Administration’s website, and that age will be somewhere between 65 and 67 years of age.  If you wait until your ‘full’ age of retirement, your social security income will be higher.


65- Can apply for Medicare, Medicare Advantage, and Supplemental plans

This is a big money saver!!  Medicare (part A and B) is our health safety net for all Americans (citizens and legal residents) who have worked a minimum of 40-quarters (10-years).  Spouses of primary income earners are automatically covered as well.  You must apply for Medicare within your ‘7-month window’ of opportunity—typically 3-months before and 3-months after the month of your 65th birthday.  If you do not apply when you are first eligible, you will incur a penalty equal to 10% for each 12-month period you do not enroll into a Medicare part B plan.  A similar penalty will apply for those who choose not to postpone their enrollment into a Prescription Drug Plan when eligible, and do not have any creditable coverage.  However, if you still work with an employer who is providing medical benefits through a group plan that is creditable, you would not be subject to the late enrollment penalty when you go to apply later on.


70 ½ Must take RMDs from IRAs

Finally, the government wants their share!  Remember all those 401k and IRA contributions you made when you were in your 20s and 30s?  Remember that you did not pay income tax on the money that was contributed to your retirement plans?  Also, do you remember that you did not pay any tax on the growth of that money each year over the past 30 or 40-years?  Well so does the Internal Revenue Service (IRS)…and they are keeping good records on your account!

Starting in the year after you turn 70 1/2 (there’s that half-year birthday thing again), you MUST start withdrawing a certain percentage of your retirement savings each and every year.  This is known as a Required Minimum Distribution, or RMD.  The IRS requires this because they have determined (what other reason would they have?) that you have benefited from tax-free growth for long enough.  There is a specific IRS chart to help you plan for these RMDs, and there is a 50% penalty for not abiding by the required schedule of withdrawals.  Yes folks, one of the steepest penalties in the tax code is directed at seniors who intentionally (and possibly unknowingly) did not take an RMD.  Make sure you act on these mandated withdrawal schedules to avoid a steep penalty!


Personal Responsibility

The above government IRS requirements primarily pertain to retirement based accounts.  There are many ways to title and holds assets without adhering to these somewhat stringent requirements.  Additionally, while investment companies might send out notifications or alerts in regards to your IRS determined age eligible requirements, it is ultimately “your” responsibility to ensure you are in compliance with rules and the subsequent penalties affecting you.  Seeking the help of a financial planner and tax-professional can help you in your attempt to manage taxes, avoid penalties, and protect your assets.  Inquire with my office for more details.