“Retirement age” can mean different things to different people, as there are many things to consider when choosing your planned retirement age.
Well-conceived planning in the years before your actual retirement day can make a significant difference in the ultimate value of the assets available to you in retirement. Tax implications and the rules surrounding Social Security benefits make it important to be aware of key dates.
Here’s a look at factors that might help you choose the best planned retirement age for you.
*Information provided is believed to be accurate as of the original date of publication of this video.
If part of your asset mix includes a 401(k) account and/or an individual retirement account (IRA), there are provisions in the IRS code that allow you to increase your contributions to such accounts once you reach 50 years old. Originally implemented as part of the Economic Growth and Tax Relief Reconciliation Act of 2001, these changes became permanent in 2006.
These catch-up contributions allow savers to contribute amounts in excess of the standard limit to their qualified retirement account. For 2019, the standard contribution limit to an IRA is $6,000 and the catch-up contribution cap is an additional $1,000. For those who participate in 401(k) or similar 403(b) accounts, the standard limit is currently $19,000 and the catch-up allowance is $6,000.
The IRS recently announced increases for tax year 2020 to contribution limits for 401(k), 403(b), and most 457 plans from $19,000 to $19,500. The limit for SIMPLE retirement accounts increased from $13,000 to $13,500. Catch-up contributions for employees aged 50 and over increased from $6,000 to $6,500. The income ranges to determine eligibility to make deductible contributions to traditional IRAs and to contribute to Roth IRAs also increased. The details are in the IRS’s Press Release.
If you choose to retire (or are laid off or fired) during the calendar year in which you become 55 years old, you may begin drawing on your 401(k) account without incurring the normal 10% early withdrawal penalty. This IRS rule allows anyone who departs the workforce for any reason between the ages of 55 and 59½ to pull money from their account without penalty. This rule does not apply to IRA accounts.
There is a significant caveat to this approach however. This “IRS Rule of 55” only applies to 401(k) and 403(b) accounts you are currently investing in through the company you have just left. Money in accounts held at former employers is not eligible for the early withdrawal penalty exemption.
All holders of traditional IRA and 401(k) accounts may access the funds at age 59.5 without penalty. If your planned retirement age is 59.5 and you need to access the funds, you just need to consider the tax implications of such a withdrawal. Withdrawals are considered income and must be reported on your federal income tax form 1040.
Originally created by federal legislation in 1975, traditional IRA accounts need to be differentiated from Roth IRAs for tax purposes. Since your Roth contributions are made with after-tax money, withdrawals after age 59.5 are not taxed. Roth accounts were established as part of the Taxpayer Relief Act of 1997.
This is the trigger age at which you may begin accessing the Social Security benefits that you have spent a lifetime accumulating. There are a few important considerations to help guide you in deciding when to begin taking these benefits.
According to Social Security Administration guidelines, if you draw upon your account at age 62, and your full retirement age is 66, you will get 75% of the monthly benefit because you will be getting benefits for an additional 48 months. If you were born after 1954, your benefit will be reduced by 30% if you begin the process at age 62. Please see ssa.gov for additional examples.
At this age you are able to sign up for medical benefits under Medicare. You may actually sign up 90 days prior to your birthday. It’s important not to let this date slip by: The monthly premiums that you will pay could be permanently raised if you fail to register on time.
Bear in mind that If you have higher current income than most, you’ll pay an additional premium amount on a sliding scale for Medicare Part B and Medicare prescription drug coverage. According to ssa.gov, this premium impacts less than 5% of the population.
The Social Security Administration determines full retirement age and full Social Security benefits. Examples of full retirement age according to the year you were born are below:
- For people born between 1943 to 1954: 66 years old
- For people born in 1957: 66 years and 6 months
- For people born in 1960 and later: 67 years old
If part of your asset mix includes an IRA or 401(k), you must begin taking distributions at this age. Known as required minimum distributions (RMDs), this is the least amount of money you must withdraw from a tax-deferred retirement plan each year after you reach the age of 70.5. Keep in mind that you will pay ordinary income taxes on the taxable portion of your withdrawal. Required minimum distributions do not affect Roth IRAs because of their after-tax status.
The amount of your annual RMD is calculated by taking the market value of your accounts and dividing it by a life expectancy factor as determined by the IRS. It’s important to note that if you don't take the minimum withdrawal, there is a 50% federal penalty tax on the amount of the RMD.
We hope this helps you know the facts. You may also enjoy watching the Retirement Planning Guide for Couples video from Carnegie Investment Counsel.
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