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Birthdays that matter

May 21, 2019

We can all remember the significance of a number of birthdays over the years.  While not every birthday felt important, there were many along the way that stood out.  Who can forget becoming old enough to drive, vote, or buy alcohol?  Once we become adults it seems like the milestone birthdays become fewer and farther apart.  You probably do not realize it, but there are several important birthdays we need to be aware of when discussing retirement.  Below you will find a brief list of birthdays that may give you reason to celebrate.  

1.  Turning 50!  Once we reach the age of 50, most retirement plans allow individuals to contribute more to their retirement account.  This additional amount of money is commonly referred to as a Catch-up contribution.  For example a 49 year old individual making a contribution to an IRA would only be able to contribute $6,000 in 2019.  A person 50 or older would be allowed to contribute an extra $1,000 for a total of $7,000 into an IRA in 2019.  401(k)s and 403(b) also allow a $6,000 catch-up contribution in 2019 on top of the $19,000 maximum that a person under the age of 50 is allowed to contribute.  That means a person over the age of 50 would be able to contribute a total of $25,000 to their 401(k) or 403(b).  The catch-up contributions allow people approaching the end of their work careers to save additional money for retirement.

2.  591/2.  When I think of half birthdays I think of toddlers.  But those half birthdays are important on at least two occasions.  59 1/2 and 70 1/2.  We will discuss 59  1/2 now and 70 1/2 later.  The importance of 59 1/2 is the removal of the 10% early distribution penalty.  If I need to take money out of one of my qualified retirement accounts, and I am under the age of 59 1/2 then I would have to pay an additonal 10% in taxes.  To keep it simple, if I took a distribution of $2,500 from my Traditional IRA, I would have to add $2,500 to my income for the year.  I would also have to pay $250 (10% of 2,500) in taxes due to the penalty on top of the ordinary income tax that applies to the distribution.  If I am 59 1/2 I no longer have to worry about the 10% penalty and can keep more of my money in my pocket.    

3.  Age 62 is the first time a person will have the option of turning on their social security income.  Social Security income can be the majority of a person's income in retirement if not their only source of income in retirement.  If you claim Social Security at age 62 you will be locking yourself into the smallest amount of social security income available.  The reason the benefit is smaller is because the Social Security Administration anticipates making the monthly payment for a longer period of time.  If a person is thinking about working and claiming social security, they will need to be aware that their social security benefit can be reduced if they earn too much income through their job.  This is a complicated issue so I will save more on this subject for another post.  Know that you can find information through the IRS or the Social Security Administration regarding work and social security income.

4.  65.  If you are a person that wants to retire at age 62 and rely on Social Security, be aware that you may have to provide your own insurance until you reach age 65.  Once a person reaches age 65 they will become eligible for medicare.  Medicare is the main insurance for seniors over the age of 65.  Medicare consist of Part A (hospital), Part B (doctor), and Part D (prescription drug coverage).  In addition to parts A, B, and D a senior may want to consider a Medicare Advantage plan or Medicare Supplement plan.  Medicare does a pretty good job of covering a lot of health care needs for seniors.  But it does not cover everything.  These additional plans can help cover the costs that original medicare does not cover. 

5.  66/67  I will include two ages for this one.  Full Retirement Age is the age where a person can receive 100% of their retirement benefit from Social Security.  The benefit of waiting until your full retirement age versus claiming Social Security at age 62 could mean the difference of a few hundred dollars a month or even several thousand dollars of income over the course of a year. 

6. Age 70.  This is the absolute latest a person would want to claim Social Security. At this age, you will receive the highest monthly benefit possible from the SSA.  The longer a person can wait before claiming Social Security, the higher the monthly benefit will be for the rest of the individuals life.  Good things come to those who wait. 

7.  Last but not least is 70 1/2.  At age 70 1/2 individuals are required to take money out of qualified retirement accounts.  Most retirement plans operate on a pre-tax basis.  This means in the year you made the contribution to your retirement account, you were never taxed on that income because you contributed to your retirement account.  Since you were never taxed on that money, you will be taxed when you start taking the money out of the account.  We can not wait indefinitely, we have to start taking income no later then 70 1/2.  These distributions starting at age 70 1/2 are known as Required Minimum Distributions.  Basically this is the governments way of saying you need to start paying us those taxes that you have avoided for the last however many years. You do not want to miss taking a RMD because the penalty is steep.  It could be as high as 50% of the money that should have been taken out of the account but was not.   

This list will hopefully be a useful list of important birthdays that can help an individual plan for retirement.