Retirement Planning: Age Before Beauty
There is more to look forward to than just senior citizen discounts as you approach the end of your working career. When you cross certain thresholds, you may benefit from special provisions affecting retirement savers. Here is a brief rundown of these age-based mileposts.
Social Security benefits: Generally, you must wait until a specified age before you can claim the full amount of your Social Security retirement benefits. The full retirement age, which is based on the year in which you were born, is age 66 for most baby boomers and gradually increases to age 67. However, you may opt to claim a lower monthly benefit amount at age 62 or a higher amount by postponing your application until age 70. With professional assistance, you can crunch the numbers and figure out the best approach for your personal situation.
Catch-up contributions: Although the tax law provides generous annual limits on contributions to qualified retirement plans where you work, such as a 401(k) plan, as well as traditional and Roth IRAs, you can do even better after you have reached age 50. To help you save more for retirement later in your working years, you can add a “catch-up contribution” to your regular contribution. For instance, in 2014 you can increase the maximum 401(k) deferral of $17,500 by $5,500 or tack on another $1,000 to the maximum $5,500 IRA contribution.
Early distributions: Typically, you cannot withdraw funds from a qualified plan or IRA prior to age 59½ without paying a penalty tax—on top of regular income tax—unless a special exception applies. However, you may tap into a qualified plan (but not an IRA) in the year you turn age 55 if you retire, quit or are laid off from your job (age 50 for public-safety workers). Another provision allows you to take substantially equal periodic payments (SEPPs) under one of three IRS-approved methods. The SEPPs are made over your life expectancy or the joint life expectancies of you and a beneficiary (or beneficiaries).
Once you reach the magic age of 59½, you can take penalty-free distributions from qualified plans and IRAs, but you still must pay any regular income tax that is due. Note that distributions from a Roth IRA that has been in existence five years are completely tax-free.
Required minimum distributions (RMDs): On the downside, you’re generally required to begin taking RMDs from qualified plans and IRAs in the year after the year you turn age 70½.This requirement is postponed until retirement for qualified plans (but not IRAs) if you are still working full-time and you do not own 5% or more of the company. Furthermore, the rule for RMDs does not apply to Roth IRAs during your lifetime.
As you can see, age clearly matters in retirement planning. Whenever possible, avoid penalties for age-related requirements and take advantage of the breaks for getting older. Your professional advisers can assist you.