When you’re a kid, there are certain birthdays you can’t help but look forward to. When you’re sixteen and can drive, for example. When you turn eighteen and can vote. When you turn twenty-one and can…well, you know.
As adults, we typically don’t see ages the same way that kids do. But some ages are particularly important. Why? Because they have significant implications for your finances. Here are three of those milestones:
When you turn 59.5, the early withdrawal penalty on your IRA and 401(k) will end. It is also the age at which many plans allow you to roll your balance into an IRA. Having the penalty removed means you can withdraw money from your retirement accounts without facing a 10% penalty. That's good news if you ever need a quick infusion of cash!
However, there are a few things to keep in mind before deciding whether to take advantage of this. First, it's important to understand that, while the 10% early withdrawal penalty will no longer apply, any withdrawals you make from your retirement accounts will still be taxed as regular income. So, it's hardly free money. Second, you should know that it's often a good idea to leave that money in a retirement account. That’s because the money inside these accounts should ideally go to one thing: your retirement! That way you’ll have the means to do what you want to do, go where you want to go, and live the life you want to live.
Many pre-retirees roll their 401(k) balance into an IRA to get access to professional management and often more investment choices. There are many things to consider when looking at this option, cost being one of the biggest. While you do pay fees within a 401(k), costs can rise if using professional
management. It’s important to consult with a professional to determine whether this option makes sense for you.
Depending on when you were born, this is when you reach your Full-Retirement Age – the age at which you can begin taking Social Security benefits without any reduction. Below is a list that shows the Full Retirement Age for every birth year, starting with 1955.1
Year of Birth Full-Retirement Age
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 and later 67 years of age
While waiting until your Full-Retirement Age means you can take Social Security without any reductions, you can potentially increase your payments if you wait even beyond your Full-Retirement Age! In fact, your Social Security benefits increase by 8% for each year you wait to start your payments up to age 70. After you turn 70, there's no additional benefit to waiting.
From a financial standpoint, turning 72 is one of the most important birthdays you can have. That’s because it’s now time to start rewarding yourself every year with a special kind of present called Required Minimum Distributions.
You see, once you reach age 72, you must begin taking annual withdrawals from any 401(k)s, 403(b)s, or traditional IRAs you have. (Roth IRAs don’t require withdrawals until after the death of the owner.) These withdrawals are called Required Minimum Distributions, or RMDs. RMDs are essentially the government’s way of ensuring people use tax advantaged accounts for what they were designed – to fund retirement. And yes, RMDs are usually taxed as ordinary income.
What happens if you don’t take distributions? Simple: The IRS will hit you with a 50% penalty based on the amount you should have withdrawn. The penalty also applies if you don’t take out at least the minimum amount required.
How RMDs are calculated: So, how much will you have to withdraw when you take out your annual distributions? Here’s the formula in a nutshell. To calculate your RMD, first take the balance of your IRA (or other retirement plan) as it stood on December 31 of the previous year. Then, divide that
balance by your life expectancy factor, which is determined by the IRS every year. You can find the factor that’s specific to you by consulting with the proper calculation tables on the IRS website2, but I have a better idea. As you get nearer to age 72, let’s sit down together and create an RMD schedule for you! We’ll create a plan so you know exactly when to take each RMD, how much to withdraw, and even what areas of retirement each dollar should be applied to. This way, I can do the “heavy lifting”, so you don’t have to.
If you have any questions about these milestone ages or how they’ll impact your finances, please let me know. And be sure to contact me with any questions about RMDs. RMDs are a particularly important part of retirement planning, so we should definitely talk about them early. In the meantime, let
me know if there is anything else I can do for you!
1“Retirement Benefits,” Social Security Administration, https://www.ssa.gov/benefits/retirement/planner/agereduction.html
2“Publication 590-B (2020), Distributions from Individual Retirement Arrangements (IRAs),” Internal Revenue Service, https://www.irs.gov/publications/p590b