A financially secure retirement is one of the topics that many taxpayers are interested in to have less of a financial burden at the age of retirement. The best way to ensure a secure retirement is early planning by understanding the retirement rules and setting up a strategy that suites each taxpayers goals. There are important ages for retirement planning that taxpayers should know to help maximize their retirement benefits while avoiding unnecessary taxes and/or penalties. Knowing the rules and the dates will help all taxpayers make appropriate decisions related to their retirement planning, and it will strengthen their retirement portfolio. The following are a few important ages and the implications and importance of those ages as it relates to a taxpayers retirement.
Age 49 and Under
By investing early and staying invested, taxpayers can expect to take advantage of compound earnings as the money they earn from the investment is reinvested allowing for the opportunity to earn even more. For those taxpayers younger than age 50, they can enjoy a tax break by contributing to a traditional or Roth 401(k) or a traditional or Roth individual retirement account (IRA) up to $19,500 and $6,000 respectively in 2021. At this age a person’s tax bracket may be lower than it will be at retirement which may make a Roth IRA an exciting option to grow money that will be tax free in the future. In addition, the longer the time it has to grow the more benefit that tax free income may be in the future.
When a taxpayer reaches age 50 they become eligible to make an additional $6,500 of catch-up contributions to 401(k) for a total of $26,000 in 2021. Also, they can contribute $1,000 more to the traditional or Roth IRA for a total of $7,000 in 2021. This allows taxpayers to grow their retirements a little bit faster. Additionally, a taxpayer at this age may find themselves in a higher tax bracket making the additional contributions to traditional plans more tax beneficial and allowing for a larger amount of deferred taxes each year.
At this age life the Rule of 55 applies. If taxpayers are laid off, fired, or quit their job at age of 55 or older, they may be allowed to pull money out of their 401(k) without paying the 10% early withdrawal penalty. They will, however, be required to pay any income taxes related to such distribution. Taxpayers who decide to roll their 401(k) account over to an IRA, will not apply and will still need to wait until age 59 ½ to withdraw money without any penalty.
Age 59 ½
At this age is when taxpayers are allowed to begin withdrawing on their retirement accounts without being subject to the 10% early withdrawal penalty. While a taxpayer can begin taking retirement money at this time they are not required to do so and since certain withdrawals will be subject to income tax continued deferral and growth may still be the best approach depending on the needs and situation of the taxpayer.
At this age taxpayers may begin receiving their Social Security retirement benefits. The amount of these benefits will be reduced if you have not yet reached full retirement age. The amount of benefit a taxpayer is eligible to receive will increase if they delay taking the benefits up to age 70.
This is when most taxpayers are eligible for Medicare which will cover their cost of hospital care and other health services. Taxpayers can start signing up for Medicare during a seven-month period that begins three months before the month they turn 65. If enrollment is delayed due to coverage from a spouses group health plan at their job, then the taxpayer should sign up within eight months of leaving the job or health plan. If a taxpayer does not sign up on time the premium will increase by 10% for each 12-month period of they were eligible but failed to enroll.
For those who were born between 1943 and 1954, age 66 and 2 months is their full retirement age for Social Security benefits and increases 66 and 10 months for those born between 1955 and 1959. Once they reach their full retirement age they are eligible to continue to work while receiving the benefits without having any payments withheld. They can delay getting the Social Security benefits until age 70 to maximize the benefits they would be entitled to receive.
For those who were born 1960 or later, age 67 is their full retirement age for Social Security benefits. They can also delay getting the Social Security benefits until age 70 to maximize the benefits.
If taxpayers delay taking their Social Security benefits from their full retirement age to age 70, they can boost their Social Security payments. The benefit payments will increase by 8% for each year the taxpayers wait. Any further delay after age 70 will not increase any of the benefit amounts they are entitled to receive.
At age 72 taxpayers need to begin taking Required Minimum Distributions (RMDs) from their 401(k) and traditional IRAs (70 ½ if they had reached 70 ½ before January 2020). Taxpayers can delay the first distribution until April 1st in the year after they turn 72, and those who delay the first withdrawal need to take the second distribution by December 31st of the same year which could potentially have a negative impact on the taxes in that year as their income would be increased by taking 2 distributions in 1 year. 2020 RMDs were waived by the CARES Act, and 2021 RMDs are calculated as if the 2020 waiver had not occurred.
As shown above there are a lot of different events that occur throughout your life as it relates to retirement. Understanding the retirement rules will help you plan ahead of retirement and bring you one step closer to your retirement goals. Everyone has a different financial situation and retirement goals, so you need to find the right strategy that will secure your retirement. If you have any questions regarding retirement planning and how it might affect you or your tax return, or if you require any other assistance with your tax planning and/or compliance needs, please do not hesitate to contact one of our knowledgeable team members.