Retirement Deadlines and Financial Advisor Insights
When is it possible to withdraw from your savings without incurring a penalty? When is the optimal time to sign up for Medicare? What is the ideal age to start receiving Social Security?
In the years preceding retirement, there are several important milestones and deadlines that require careful consideration. If these critical points are overlooked, the repercussions can be significant. Let's explore eight important moments to help guide you on your retirement path.
Age 50-Catch up Time
Catch-up contributions allow people aged 50 and above to save more money for their retirement. As people reach this milestone age, they often realize the need to accelerate their retirement savings to ensure a comfortable future. The IRS allows catch-up contributions to help people save more for retirement if they haven't saved enough.
For 401(k)s, the standard annual contribution limit for 2023 is $22,500. However, once you turn 50, you become eligible to contribute an additional catch-up amount of up to $7,500 per year.
Similarly, the standard contribution limit for 2023 for a SIMPLE plan is $15,500. With the catch-up option, you can add $3,500 to the SIMPLE.
It is important to note that catch-up contributions are optional and not mandatory. These plans help people save more for retirement, but it's their choice if they want to use them or not.
Age 55-Rule of 55
Typically, making an early withdrawal from a workplace retirement plan can result in a penalty. This penalty is imposed by the government to discourage individuals from accessing their retirement savings before reaching a certain age.
However, there are circumstances where people can take money out of their retirement plan without having to pay a penalty. One such circumstance is when an individual is 55 years or older and loses or quits their job. In this situation, they may be eligible to start withdrawing money from their 401(k) account without facing any penalty.
Even if there is no penalty for taking money out early, you still have to pay taxes. You must still declare the taken money as taxable income when you file your yearly tax return.
Age 59 1/2-Say goodbye to early withdrawal penalty
Remember when you used to celebrate your half-birthday? While those days are likely behind you, turning 59½ might be a milestone worth acknowledging.
The reason? After turning 59½, people can take out money from their retirement plans and IRAs without paying a 10% penalty. This milestone age serves as a turning point where individuals gain more flexibility and control over their retirement savings.
While this general rule applies in most cases, there are certain exceptions that individuals should be aware of. Seeking advice from a tax advisor and a financial advisor will help individuals gain a comprehensive understanding of their situation.
Age 62-Eligible to start claiming social security
Once you reach the age of 62, you become eligible to begin receiving Social Security payments. If you claim benefits before your full retirement age, the amount you get each month will be permanently reduced. It is advisable to consult with a financial advisor to determine the optimal time for initiating your Social Security benefits.
Age 65-Medicare Enrollment Time
Many Americans who reach a certain age are eligible for Medicare. Medicare covers a wide range of medical expenses, including doctor visits, hospital care, and other necessary services. Medicare has four parts: A, B, C, and D. Understanding and enrolling in each part can be complicated. Therefore, it is beneficial to seek professional assistance.
Age 66-67-Full Retirement Age
Your full retirement age (FRA) is determined by the year you were born. In the past, the FRA used to be 65 for everyone. However, due to changes in legislation, the FRA has gradually increased for individuals born after a certain year.
For example, if you were born between 1943 and 1954, your FRA is 66. If you were born in 1960 or later, your FRA is 67. For those born between these years, the FRA falls somewhere in between.
Reaching your FRA is significant because it allows you to receive your full standard benefit amount. If you wait until you reach your FRA to claim your benefits, you will receive the full amount you deserve. This amount is determined by your lifetime earnings and work history. However, if you choose to claim your benefits before reaching your FRA, your monthly benefit amount will be reduced.
Age 70-Maximum Social Security Benefit unlocked
Starting Social Security benefits at age 70 can boost your retirement credits and increase your monthly benefit amount. By deferring your claim until this age, you can ensure that you receive the maximum possible monthly benefit.
The rationale behind this strategy lies in the concept of retirement credits. If you wait to claim Social Security benefits from 62 to 70, you earn more credits and increase your benefit amount. Credits are calculated using a formula that considers your earnings and the average wage index throughout your life.
By waiting until age 70, you can accumulate the maximum number of credits, resulting in a higher monthly benefit. This is helpful if you expect to live longer or if you have other income to support you until this age.
However, it is important to note that there is no financial advantage in further delaying your claim beyond age 70. When you reach this age, you have earned the most retirement credits possible, and waiting longer won't increase your benefit.
Age 73-Begin Required Minimum Distributions
People contribute to 401(k)s to reduce taxes when they work. People can delay paying taxes on their money by using a 401(k) retirement plan. They can do this until they take the money out in the future. This tax-deferred status allows their savings to grow without being diminished by immediate tax obligations.
However, it is important to note that this tax advantage is not permanent. The IRS makes people take out money from their 401(k) accounts when they reach a certain age. This is called required minimum distributions or RMDs. The purpose of these mandatory withdrawals is to ensure that the government collects taxes on the accumulated funds.
People typically begin withdrawing money from their 401(k) accounts at age 72. However, the specific age may vary depending on factors such as birth year and personal circumstances. Failure to comply with these regulations may result in penalties and additional taxes.
Bottom Line
Preparing for retirement involves more than just counting the years; it means recognizing and preparing for important milestones along the way. If you know someone aged 50-73, it's helpful to share this info with them. It could give them the guidance they need.
Sources:
www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-catch-up-contributions
www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions
www.ssa.gov/benefits/retirement/planner/agereduction.html
irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
Disclosures:
This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.
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