The following is presented for informational purposes only and is not intended as tax or legal advice.
Many people only think about taxes twice a year. In December, when there’s a last opportunity to make changes for the year, and when they prepare and file their tax return sometime between January and mid-April. But as many tax professionals will tell you, tax planning is often a year-long process.
Once you’re a quinquagenarian (i.e., 50 or older), certain birthdays can be especially important because they usher in changes to your financial opportunities and benefits. Whether you’re about to retire or already passed that point and looking to learn more, here are a few of the important changes that come with age.
Age 50 — Catch-Up Contributions Kick In
As you near retirement, you’re allowed to make additional tax-deductible contributions to your traditional individual retirement account (IRAs), 401(k), and other employer-sponsored retirement plans. These catch-up contributions can help you boost your account balances, giving you increased earnings potential and an extra cushion as you slow down or stop working.
In 2019, the annual employer-sponsored plan limit increased to $25,000 and the IRA limit is now $7,000. The limits are $19,000 and $5,000, respectively, for those under 50. There were other increases to small business retirement plan and healthcare savings accounts contribution limits as well. Additionally, if you were a public safety employee (such as a police officer or firefighter), you can also start taking penalty-free distributions from government defined contribution and benefit plans once you turn 50.
Age 55 — Take Penalty-Free Withdrawals From Eligible Retirement Accounts
When you turn 55, the “rule of 55” means you can start taking money from an employer-sponsored retirement plan, such as a 401(k) or 403(b), without paying the 10 percent penalty. However, there are a few limitations.
To qualify, you can’t still be working for the company that sponsored the retirement plan. Additionally, you need to have left the company during or after the year you turn 55. Even then, if you rolled over your 401(k) into an IRA, the money won’t qualify for a penalty-free withdrawal based on the rule of 55.
Age 59½ — Take Penalty-Free IRA Withdrawals
Unless you qualify for an exception, you could have to pay a 10 percent penalty on the money you take out of your IRA before you turn 59½. After your half-birthday, you can take the money out for any reason. In either case, you may need to include the withdrawals in your taxable income for the year.
Age 62 — Start Collecting Social Security
The earliest age you can begin taking Social Security retirement benefits is 62. However, if you start collecting Social Security right away, you’ll lock-in a reduced monthly benefit.
To get the full benefit, you need to wait until your full retirement age, which can range from 65 to 67 depending on when you were born. If you delay more, the monthly benefit will continue to increase until you turn 70.
Deciding when to start collecting Social Security is an important part of retirement planning. In some cases, it makes sense to start right away, while other times it’s best to wait and tap other accounts or keep working instead. In part, this is because you may have to pay taxes on your Social Security benefits depending on your total income.
Age 65 — Receive Increased Standard Deductions
Once you (or your spouse, if you file your taxes jointly) reach age 65, your standard deduction will increase by $1,300, which can lower your taxable income if you don’t itemize your deductions. If both spouses are 65 or older and file jointly, their standard deduction increases by $2,600.
You can also qualify for the tax credit for the elderly or disabled once you’re 65. To receive the credit, which could be worth $3,750 to $7,500, you’ll need to be below the AGI limits for the year. They are $12,500 to $25,000 as of 2019, depending on your tax filing status. There’s an additional limit on nontaxable Social Security, annuities, and disability income that ranges from $3,750 to $7,500.
Your 65th birthday is also important because this is when you’ll be eligible for Medicare.
Age 70½ — Don’t Forget About Required Minimum Distributions
Once you turn 70½, you’ll have to start taking distributions from your traditional tax-deferred retirement accounts, including IRAs, rollover IRAs, and 401(k)s. Roth accounts are exempt from this requirement.
You have to take your first required minimum distribution (RMD) by April 1 of the year following the year your turn 70½. For example, if your birthday is on January 15, 2019, then you can choose to take your first RMD by the end of 2019 or by April 1, 2020.
In subsequent years, the RMD has to be taken by the end of the calendar year. As a result, delaying that first RMD will lead to taking two distributions in one year, which could increase your tax bracket.
Figuring out how much you need to withdraw (calculators can help) and taking those distributions can be important. If you don’t take out at least the required minimum distribution (RMD) amount, you have to pay a 50 percent penalty on the money you should have withdrawn.
Do you have more questions?
Whether you’re unsure if you have enough saved for retirement, want help preparing a budget, have questions about benefits, are curious about ways to use your home equity to supplement your income, or are dealing with one of the many other financial questions that seniors often face, Money Management International’s counselors may be able to help. There are free and low-cost opportunities available, and you can schedule an initial consultation online or over the phone.