A: Over a two-decade span ranging from ages 50 to 70-1/2, investors will face multiple milestone decisions that will likely impact their retirement savings and portfolio. As you navigate through each decision, you’ll need to be aware of how rules governing Social Security, Medicare and your taxes will come into play. Take steps now to be prepared as these milestones approach:
Give your retirement savings a boost by making “catch-up” contributions. Internal Revenue Service (IRS) rules for 2016 allow those 50 and older to invest an additional $1,000 per year (for a maximum of $6,500 per year) in an IRA, and another $6,000 per year (to a maximum of $24,000) in a workplace retirement plan such as a 401(k).
This may be the first opportunity you have to make penalty-free withdrawals (income taxes still apply) from employer-based qualified plans. To become eligible, you must first retire from your employer in the year you turn 55 or later. While tapping into your retirement income may make sense for you, consider the impact early withdrawals could have on your long-term financial security before taking action.
At this age, you have more penalty-free access to your retirement assets–meaning you can take distributions from IRAs and potentially from qualified work plans (check with your Human Resources department to see what rules apply to you). Keep in mind that withdrawing from your nest egg early is a risk to your long-term financial situation. Taxes are due on distributions attributable to pre-tax contributions and earnings.
You first become eligible to claim retirement benefits from Social Security at age 62. The earlier you claim benefits, the lower the monthly payout will be. Many investors choose to claim at a later age, because you can receive a higher monthly benefit. If you do decide to claim benefits at age 62 while you continue to receive a paycheck, your Social Security benefits may be reduced until you reach full retirement age (defined below).
You qualify for Medicare coverage starting at age 65. You’ll automatically be enrolled in Medicare Parts A and B if you’re receiving Social Security at this time. Otherwise, you need to apply for it. Your application window is the three months of either side of your 65th birthday month. Medicare is complex, so make sure to research what options are available to you.
Depending on your birth year, you reach what Social Security defines as “full retirement age” at 66 or 67. Visit www.ssa.gov/planners/retire/retirechart to learn what age that is for you. If you wait until now to receive Social Security benefits, you’ll have more ways to structure your benefits. Married couples in particular tend to have many options, so be sure to coordinate your decisions with your spouse.
Your maximum monthly benefit is available after your 70th birthday. If you haven’t claimed Social Security benefits, you should do so as there is no advantage to waiting beyond this date. You may want to consider donating your benefit if you have other investments that cover your expenses.
By April 1 of the year after you turn 70-1/2, you are required to take a minimum distribution from traditional IRAs and workplace retirement plans. The IRS calculates the amount you pay (called Required Minimum Distributions or RMDs) using the Uniform Lifetime Table and your age at the time you’re talking the distribution. Instructions for calculating RMDs can be found in IRS Publication 590 at www.irs.gov. Distributions must be taken from each account that is subject to this rule. Failure to do so can result in penalty of 50 percent of the amount that was required to be distributed.
If you have questions about making these milestone decisions or want to get an objective opinion, consider hiring a financial advisor. Find an advisor who will look comprehensively at your financial situation and your retirement goals, in order to help you make decisions with increased confidence.
Christopher Zarra, CFP®, ChFC®, CFS®, is a Financial Advisor with Ameriprise Financial Services, Inc. in Rockville Centre, New York. He specializes in fee-based financial planning and asset management strategies and has been in practice for 22 years. To contact him, www.ChrisZarra.com, (516)764-0951, 119 N. Park Avenue, Suite 307, Rockville Centre, NY 11570.
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