8 Birthdays that Matter for Retirement
Birthdays can be exciting, especially when you are young. Of course, there is your 1st birthday, 10th birthday (double digits - woohoo!), 13th birthday (let the teenage angst begin), 16th birthday (new driver in town), 18th birthday (let your opinion be heard - vote!), and 21st birthday (margaritas on the beach anyone?).
As you get older, birthdays slowly become less exciting and may even be dreaded. However, there are some ages that you should celebrate, or at least make note of, that can affect your retirement planning.
Here’s a list of birthdays to keep in mind:
Age 50: Catch-up Contributions
Once you turn 50 years old, you can make catch-up contributions to your retirement accounts. Employees can contribute an extra $6,500 to a 401(k) or 403(b) for a maximum contribution limit of $26,000 in 2021. In addition, you may contribute an extra $1,000 to your Traditional or Roth IRA, with a maximum contribution limit of $7,000.
By making catch-up contributions, those nearing retirement can tuck away additional money into their retirement accounts as well as reduce their taxable income for that year.
Age 55: 401(k) Withdrawal
If you leave your job during or after you reach age 55, you may be eligible to take a distribution from your 401(k) without paying the 10% early withdrawal penalty. However, income tax will still be applicable for each traditional 401(k) distribution. If you rolled your funds over from a 401(k) to an IRA, you will need to wait until age 59 ½ to take IRA withdrawals without penalty.
Age 59 ½: IRA Withdrawal
This milestone is a bit harder to remember, as it happens on your half birthday. Normally distributions taken before this age invoke a 10% early withdrawal penalty. (Although there are certain circumstances that can avoid the penalty like a first-time home purchase or qualified medical expenses.) However, once you hit this milestone you can begin to take distributions from your IRA for any reason without penalty. Keep in mind, though, that you may still owe income tax on the distributions.
Age 62: Minimum Age for Social Security Benefits
When you turn 62, you have reached the minimum age at which you may choose to begin receiving Social Security retirement benefits. Although many people dream about retiring early, if you begin collecting your benefits at age 62, your monthly check will be permanently reduced by as much as 30%. However, for some it may make sense to receive the income from Social Security as soon as you are eligible. Consider speaking with a financial advisor even before you turn 62 to decide what route is best for your financial situation.
Age 65: Medicare
At age 65 you become eligible for Medicare, which is the health insurance program that the government provides to cover some doctors and hospital visits, and other health services. For more information about the program, cost, enrollment deadlines, and other things to know consider visiting Medicare.gov.
Age 66/67: Full Retirement Age
Depending on the year you were born (1943-1954 - age 66; add 2 months for each birth year until age 67 for those born during or after 1960), you will reach your full retirement age. It is at this age where you can receive the full benefit of social security. If you can hold off even longer, you can earn delayed retirement credits which will increase your benefit even further. Every year you wait to claim your benefit beyond your full retirement age, your benefit increases by 8%.
Age 70: Maximum Social Security Benefits
If you wait until age 70 to claim social security benefits, you are in luck because at this point you get the biggest possible monthly benefit. Even if you don’t need it at this point, it’s still worth taking. Delaying social security benefits after age 70 does not increase your benefit amount any further.
The practical question as to what age is ideal to start taking social security can be a tricky one, Although you can wait until age 70 to dip into your Social Security benefit, this does not mean that it is the best option for you. Many factors should be taken into consideration including life expectancy and if you plan to file for spousal benefit. A financial professional who specializes in public retirement benefits should be consulted.
Age 72: Required Minimum Distribution
If you have a traditional IRA, in which your taxes were reduced in the year you made contributions, you now are required to take a distribution and pay the taxes. This distribution is called a Required Minimum Distribution. If you have a Roth IRA where the taxes were paid upfront, there are no RMDs and any distributions can be taken tax-free.
It is crucial to take your RMD because if you miss taking it, the penalty can be 50% of the amount that should have been taken out. The first distribution must be taken by April 1 in the year you turn 72. Then, after that, you must take a distribution by Dec. 31 each year. If you delay your first withdrawal until April, you are required to take two distributions in the same year. This is not ideal as it has the potential to put you in a higher tax bracket and increase your tax bill that year.
There are a few exceptions to RMDs. If you work after age 72 for a company you do not own, you can delay taking the 401(k) withdrawals until you actually retire. In addition, you may do a qualified charitable distribution from an IRA directly into a qualified charity to satisfy the minimum distribution requirement.
You can determine your distribution period or life expectancy by using the Tables in Appendix B of Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).
As you can see, there are many milestones reached when you are older. Although we may not look forward to these ages as much as being able to vote or drive, they are important to know, since these financial decisions can affect your life in retirement.
If you're looking to invest in your retirement, schedule a call today to learn more about how Madison Trust Company can help you.