Breaking Down Important Retirement Milestones
As you approach retirement there are certain age-based milestones you should be aware of. Some of these milestones create potential planning opportunities to boost savings, maximize retirement income, or improve tax efficiency.
Others mark deadlines that could result in stiff penalties if overlooked. Below, I have listed each key retirement milestone by age along with a description.
Once you reach age 50, you can begin taking advantage of something called catch-up contributions. This provision allows you to increase your annual contributions to qualified retirement accounts during what could be the high-earning part of your career.
For instance, in 2021, participants in 401(k), 403(b), and governmental 457(b) plans can contribute as much as $19,500 per year. However, those who are age 50 and older can contribute an additional $6,500.
Additionally, there are catch-up contributions for eligible traditional and Roth IRA account holders age 50 and older. You can save an additional $1,000 above the base $6,000 federal contribution limit in 2021.
At age 55 you are able to withdrawal employer-sponsored retirement plan savings without incurring the 10% early withdrawal penalty if you leave your job or retire. Important: This only applies to assets in your current 401(k) or 403(b) and money in a former 401(k) or 403(b), or individual retirement account, is not covered. Also, if you were to roll over those assets after leaving your job, you would lose your eligibility for early penalty-free withdrawals.
In addition, this is the age where you can make catch-up contributions to your HSA account. For those eligible, the annual catch-up contribution is $1,000 above the 2021 limits of $3,600 for self-coverage and $7,200 for family coverage. However, any employer contributions that are excludable from your income reduce your contribution limit.
After age 59.5 withdrawals from qualified retirement accounts are not subject to the 10 percent early withdrawal penalty. This includes employer plans such as 401(k)s, 403(b)s, and 457s, Traditional IRAs, Roth IRAs*, Simple/SEP IRAs, and annuities. For Roth IRA distributions, they must meet the five-year holding requirement in addition to taking place after age 59.5.
62 is the earliest age you can claim Social Security benefits. * Depending on the year you were born, your monthly benefit will be permanently reduced by 25 to 30 percent of your full retirement age (FRA) amount.
Also, something called the retirement earnings test could reduce the social security benefits you receive prior to FRA if your employment income is above certain thresholds. *Important: Surviving spouses can claim survivor benefits as early as age 60.
For those eligible, the initial enrollment period for Medicare starts three months before the month you turn 65 and ends three months after the month you turn 65. Failure to enroll during this window could result in gaps in coverage or potential late enrollment penalties.
Depending on your year of birth, your Full Retirement (FRA) Age for Social Security is anywhere between 66 and 67. FRA is when you are entitled to receive 100 percent of your primary insurance amount (PIA.)
This is the last age you can receive delayed retirement credits (DRCs) for your Social Security benefit. There is no advantage to waiting to file for benefits beyond age 70.
Depending on your year of birth, this could result in you receiving up to 124 to 132 percent of your full retirement age benefit.
Traditional IRA owners may begin making qualified charitable distributions (QCD’s) at age 70.5. A QCD, allows you to donate directly to an eligible qualified 501(c)(3) charity. This distribution is then excluded from your taxable income. The annual QCD limit is $100,000 per individual.
The year you reach age 72 you must begin taking required minimum distributions (RMDs) from your employer-sponsored retirement plans and traditional IRAs. Your annual RMD is based on your age, the value of your accounts on December 31 of the previous year, and your life expectancy factor.
If you do not take your required minimum distribution by the applicable deadline, the amount not withdrawn is subject to a 50 percent tax penalty. Important: original Roth IRA owners are not subject to required minimum distributions.
These retirement milestones mark the rules of retirement as they currently stand. If the past is any indication of the future, these rules are subject to change.
If/when they do, current retirement planning strategies could become less effective. As a result, being able to process new information and adapt your plans accordingly will be an important skill to have in retirement.
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