Important Retirement Ages
Your retirement benefits are a critical component that determine your quality of life in your Golden Years. You’ve got important decisions to make before and after your retirement date that directly impact your benefits from Social Security and your retirement accounts. Overlooking a few important dates lead to some of the biggest retirement planning mistakes we see made – mistakes that could have easily been avoided.
So, open up your calendars and mark down the 8 key dates we highlight below.
3 Main Sources of Retirement Benefits
The important retirement dates relate to your Social Security, IRA and 401(k) accounts. To a significant degree, the decisions you make throughout your working years will determine how much money you’ll receive from these sources.
The Social Security program is meant to help workers avoid poverty in their old age. That’s an important benefit, but not nearly enough to fund your entire retirement. The amount you receive depends on your contributions to the Social Security fund and the age at which you claim benefits.
You contribute to Social Security (and Medicare) through the payroll taxes withheld from your paychecks. Self-employed individuals pay these taxes as part of their estimated payments. The accounting mechanism for your contributions is the Social Security credit. You earn between one and four credits a year, one for each $1,410 of annual earnings (as of 2020). The requirement for most people to qualify for benefits is to earn 40 credits, representing 10 years of work.
The maximum amount you can receive from Social Security depends on your total earnings during your working years. The more you earn, the more you can get, up to the program limits. How much you actually get depends on when you start taking benefits. Taking benefits at the wrong time is a big decision – and one of the very common retirement planning mistakes we see people make.
Social Security retirement benefits are taxable only if your overall income is above certain thresholds. For 2020, the thresholds are:
- Single filer: 50 percent of benefit for incomes between $25,000 and $34,000; 85 percent of benefit for income above $34,000
- Joint filer: 50 percent of benefit for incomes between $32,000 and $44,000; 85 percent of benefit for income above $44,000
How has Social Security been affected by COVID-19? Read our recent blog post.
Individual Retirement Accounts (IRAs)
An IRA is a defined contribution plan in which your contributions grow tax-deferred while they remain in the account. With a Traditional IRA, you deduct your contributions from your taxable earnings. You’ll later add your withdrawals to your taxable income at a time when you may be in a lower tax bracket. A Roth IRA doesn’t provide an initial tax deduction, but withdrawals are tax-free if you follow the rules.
401(k) and 403(b) Accounts
The 401(k) is an employer defined contribution plan in which employers and employees can make tax-deductible contributions.
A 403(b) is a similar account for employees of tax-exempt organizations and public schools.
Employees can exclude their contributions from their taxable income, and employers can deduct their contributions from their taxable earnings. A Roth 401(k) is similar to a Roth IRA in that employee contributions are not deductible, but withdrawals can be tax-free.
Are you ready to achieve your goals and protect your future? Contact Heritage Capital to see how we can help.
You can start making “catch-up contributions” to your retirement accounts once you reach age 50.
In 2020, the maximum annual IRA regular contribution is $6,000, but you can make an additional $1,000 catch-up contribution.
The 2020 maximum employee contribution for a 401(k) or 403(b) is $19,500, and the catch-up contribution is $6,500, for a total of $26,000. The limits for total (employer plus employee) contributions is $57,000, but for age 50-plus, the maximum is $63,500.
The “Rule of 55” applies to employees enrolled in a 401(k) who have reached age 55. The rule states that you can begin withdrawing money penalty-free from your 401(k) at age 55 if you separate from your job. This only applies to the 401(k) associated with the job you leave – it does not apply to earlier 401(k)s from previous jobs. It also doesn’t apply if you left your job before age 55.
The Rule of 55 does not apply to IRAs. However, if you can roll over your IRA and/or your previous 401(k)s into your current plan, that money can participate in the Rule of 55.
Be careful when deciding to begin withdrawals at age 55. Doing so will likely decrease the long-term value of your portfolio. In addition, your withdrawals are taxable and decrease the amount of tax-sheltered money remaining in the 401(k).
The IRS imposes a 10 percent early withdrawal penalty on the money you distribute from your IRA or 401(k) before age 59-½. This penalty doesn’t apply if you qualify for certain exemptions, or if you are participating in the Rule of 55.
The following exemptions apply to IRAs, 401(k)s and 403(b)s:
- Series of Substantially Equal Payments (SEPs)
- IRS levy
- Unreimbursed medical expenses
- Qualified military reservists called to active duty
- Qualified rollovers
401(k)/403(b)-only exemptions are:
- Corrections to excess contributions
- Qualified Domestic Relations Order (alimony, child support, etc.)
- Rule of 55
IRA-only exemptions are:
- Qualified higher education expenses
- Qualified first-time homebuyers (up to $10,000)
- Health insurance premiums paid while unemployed
- Returned contributions if withdrawn by extended due date of tax return
You can claim Social Security benefits starting at age 62. This will lock in the lowest amount for which you are eligible, and that amount won’t increase over time except for cost of living adjustments due to inflation.
Age 65 to 67
Full retirement age for Social Security begins at age 65 through 67, depending on when you were born:
- Age 65: Born before 1938
- Age 66: Born between 1943 and 1954
- Age 67: Born in 1960 or later
Full retirement age means you receive full (but not maximum) Social Security benefits, even if you are still working.
You must begin taking Social Security retirement benefits by age 70. Benefits max out at age 70, except for cost of living adjustments.
Age 70-½ or 72
Required Minimum Distributions (RMDs) are the minimum withdrawals that a retirement account owner must take each year. Before January 1, 2020, the RMD age was 70-½. Otherwise, it is age 72. The RMD is based on the IRS’ estimate of how long you will live. You must withdraw a set percentage of your account balance each year. Forgetting to do so is one of the common retirement planning mistakes we see, yet it’s very easy to avoid.
For 401(k)s, you can postpone RMDs if you are still working. Roth IRAs are not subject to the RMD rule.
If an account owner fails to withdraw a RMD, fails to withdraw the full amount of the RMD or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50 percent.
People are living longer, so 100 is the age you may want to plan for. You want to arrange your finances as if you will live to 100.