Taking steps at each of these stages on the road to retirement could help you maximize your income, minimize your taxes and avoid penalties
YEARS BEFORE MANY PEOPLE RETIRE, key dates and deadlines pop up—things like being able to make catch-up contributions to your 401(k) and IRA starting the calendar year you turn 50 and signing up for Medicare Part A at 65, even if you’re still working. If you aren’t aware of them, they’re easy to miss. Below are seven important stops along the way to retirement readiness.
“The decisions you make during pre- and post-retirement years can be important in determining how much money will be available during retirement, so it is important to understand these key dates and their implications,” Debra Greenberg, director, Retirement and Personal Wealth Solutions at Bank of America. It is also a good idea to check in with your financial advisor and tax advisors regularly in the years leading up to retirement to assess your progress toward your goals, she adds.
You’re now eligible to make “catch-up” contributions to 401(k)s and other employer-sponsored retirement plans, as well as to IRAs.1 In 2020 that means you can stash away an extra $6,500 per year in your 401(k) and an extra $1,000 per year in an IRA or Roth IRA, and you may be able to reduce your taxable income at the same time (except for any after-tax or Roth contributions).
1Consult your tax advisor as there are phase-out ranges for IRA contribution deductibility based on modified adjusted gross income (MAGI) ranges that are published annually and correspond to your federal tax filing status (married, filing jointly; married, filing separately; or single) and whether or not you participate in an employer-sponsored retirement plan.
Once you reach age 59½, withdrawals from employer-sponsored retirement plans and IRAs are no longer subject to the additional 10% federal tax on early withdrawals —though you still may owe regular income tax on the distributions. But it’s generally better to keep your tax-advantaged retirement savings or investments intact so you don’t sacrifice potential growth, suggests Greenberg.
Age 62 is the minimum age at which you can choose to begin receiving Social Security benefits. But bear in mind that for each year you postpone taking this benefit (until age 70), your monthly check will be larger. Read “Social Security: Aiming for Smarter Payments” for more insights.
If you’re already receiving Social Security, you’re automatically enrolled in both Parts A and B of Medicare. But if you aren't yet receiving Social Security, you will need to apply for Medicare during one of the designated annual enrollment periods. Your initial enrollment period lasts for seven months, beginning three months before the month in which you turn 65. Missing your enrollment date may mean penalties or even higher premiums for the rest of your life. See “Your Guide to Medicare: 5 Key Questions Answered” for more insights, including what you should do if you’re still working.
If you were born between 1943 and 1954, age 66 is your “full retirement age” for Social Security. That’s the age at which you may first become entitled to full or unreduced retirement benefits. For those born after 1954, the full retirement age will increase by two months a year until the current maximum of age 67 for those born in 1960 and later.
If you’ve waited until your 70th birthday to begin taking Social Security, you’ll now get the biggest possible monthly benefit, which may be as much as 76% larger than if you had started receiving payments at age 62. Any further delay in claiming won’t increase the size of your check.
In the year you turn 72, you generally must begin taking required minimum distributions, known as RMDs, from traditional 401(k)s, Roth 401(k)s or traditional IRAs.2 RMD amounts are calculated as a percentage of your account balances and are based on your life expectancy. If you don't take the full amount of these annual distributions within the required time frame, you'll incur an additional tax of 50% of the difference between what you received and the required amount you should have withdrawn. Be sure to speak with your tax advisor about requirements that may be specific to your situation—and to your financial advisor about how to fit these distributions into your retirement income strategy.
2If you are still working at 72, you may not have to take RMDs from your employer’s qualified retirement plan, such as a company 401(k), until the year after you retire (unless you are a 5% owner). If you were age 70 1/2 or older as of 12/31/2019, you would be required to take a required minimum distribution (“RMD”) for 2019. Effective 1/1/2020, in accordance with new legislation, the required beginning date for RMDs for individuals who turn age 70 1/2 on or after 1/1/20 is age 72. You may defer your first RMD until April 1st in the year after you turn age 70 1/2 or 72, as applicable, but then you’d be required to take two distributions in that year.
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This material should be regarded as general information on Healthcare and Social Security considerations and is not intended to provide specific healthcare or social security advice. If you have questions regarding your particular situation, please contact your legal or tax advisor.