Age is Just a Number
Your financial life has many stages. In financial planning, the government directly impacts your progress as you reach certain ages. As we start a new year, the Linscomb & Williams Wealth Management Team offers a quick refresher.
Age 50: Catch-Up Contributions
One of the most straightforward boosts to your retirement savings becomes available in the year of your 50th birthday. Once you reach this threshold, you can potentially take a bigger tax deduction by increasing investments into your pre-tax retirement accounts, such as a Traditional IRA or 401(k), or a tax-free Roth IRA. Upon reaching age 50, you can add an extra $1,000 per year to these accounts. You can add an additional $6,500 annually into your 401(k), 403(b), or other employer-sponsored plans annually. These catch-up contributions can make 50 feel like “the new 40”.
The Rule of (Age) 55
There are further financial benefits at your disposal in your 50s – Who says getting older doesn’t have its perks? You can also make withdrawals from your employer-sponsored plans with fewer tax penalties, if you retire early, or are laid-off from your job.
Normally, when making a withdrawal from a 401(k), 403(b), or other retirement plan, federal income taxes are due. But, on top of income tax, a 10 percent tax penalty is due for early withdrawal (i.e., before age 59½). But individuals over 55 are exempt from the 10 percent penalty.
Remember that the Rule of 55 only applies to employer-sponsored plans like a 401(k) – not IRAs. You’ll have to wait until you turn 59½ to make withdrawals from an IRA without penalty. Be sure to consult with your financial advisor before making a withdrawal from your retirement accounts of any type.
Age 62 and 67: Important for Social Security
In our 50 years of helping families plan their retirement income, we see repeatedly that Social Security is usually an important pillar of support during your retirement. The longer you wait to start your benefit, the more you will receive as a monthly payment.
62: When You First Become Eligible for Social Security
You are eligible to begin receiving Social Security benefits once you turn 62. Age 62, however, is considered an “early” start and your monthly check amount will be reduced from the full retirement benefit. Depending on how long you live, starting early can cost you tens of thousands of dollars in the long run. We don’t know how long we’ll live, so that part is guesswork. What is not guesswork is this: You can receive significantly more in monthly benefits if you wait until you’re near or have reached your full retirement age.
67: Full Retirement Age
For most people not yet retired, your full retirement age is likely between 66 and 67, depending on your year of birth. The five-year spread between when you first become eligible for Social Security benefits and your full retirement age can make a big difference and carry pros and cons.
Our team here in Houston is often asked about Social Security –how much will I receive, how do I start receiving benefits, will it be there for me, etc. While it’s easy to find general rules of thumb online, we encourage you to talk to a fiduciary financial advisor (who has no conflict of interest in giving you advice) to see what age makes sense for you.
Age 72: When Required Minimum Distributions (RMDs) Begin
Recent legislation raised the age when you must begin taking RMDs from a Traditional 401(k) or IRA from 70½ to 72. The government requires you to begin taking money out when you reach this age, whether you need the funds or not.
RMDs are calculated on the first day of every calendar year, and are based on your account balance on the last day of the prior year. Money withdrawn as an RMD is typically taxable. This may not be an issue if your tax bracket is considerably low. If not, or if this money will bump you into a higher tax bracket, talk to your financial advisor about donating your RMD to an eligible charity in the form of a Qualified Charitable Distribution (QCD), a special IRS exemption that can help you reduce your taxes. We find that many of our retired clients who no longer claim itemized deductions on their income tax return find this QCD strategy particularly advantageous as a way to save income taxes, and in certain cases, reduce their Medicare Premiums.
Putting It All Together
Getting older isn’t all bad news. As the saying goes, “Age is just a number”. Discuss your situation with an experienced fiduciary financial advisor so you don’t miss or mis-use the tools available for your financial planning. With proper planning, like a fine wine, your wealth will only get better with time.
Troy Taylor, CFP®
Wealth Advisor
Linscomb & Williams
Linscomb & Williams is a Houston based wealth management firm established in 1971.