The IRS doesn’t care what age is on your driver’s license…

Greetings as I peek out from my umbrella while still looking at snow –

Over the past several weeks, I’ve had a variety of conversation that have centered on what we can and can’t (shouldn’t) do with our retirement resources based on our age so I thought I would outline a brief summary of the key ages when it comes to getting older, at least when it comes to money.

Age 55 – This one sometimes surprises people but it can be pretty important if you are leaving a position (willingly or not) and have money in your company retirement plan. If you leave after turning age 55, your first instinct might be to roll those dollars over into an IRA and why not – isn’t that what I’m always telling people…  Don’t leave a jacket on the back of the door and don’t leave money in your retirement account. But wait, leaving those dollars could provide you with penalty-free access to a valuable resource if you aren’t walking into another job or your new job turns out to be a dud. Most plans allow you to access at least some company retirement dollars without the 10% tax penalty if you leave the company after age 55 but haven’t reached age 59 ½ yet so think twice before doing a knee-jerk “I’m outta here” roll over.

Age 59 ½ – Which leads me to the first “magic” number when it comes to retirement investments. While I don’t generally recommend it, you can access your retirement dollars without a 10% tax penalty once you turn age 59 ½. That means AFTER you turn age 59 ½, not the year in which you turn age 59 ½ so watching the calendar is important if this is part of your retirement income plan (because, of course, all of you have a well-structured retirement plan, don’t you….).  As with all retirement dollars, the distributions are reportable for Federal Income taxes and you may, or may not, also be paying state tax on those distribution. Once we start tapping retirement dollars, tax planning each year takes on a new level of importance.

Age 62 – When you reach age 62, you can begin accessing your Social Security benefits although you’ll do so with a pretty big permanent reduction of your benefit amount. The reduction works out to be about 8% per year for every year you are younger than your Full Retirement Age when you decide to collect. Now, collecting early if you are single (and not planning on marrying in the next few years), not in the greatest health or don’t have longevity on your side, and don’t have a lot in resources or other taxable income might be a solid strategy and I have had a few clients over the years for whom this made sense. On the whole however, it is something to think very carefully about before making this decision since it is irrevocable.

Age 65 – Surprise, whether or you take your Social Security benefits or not, and sometimes whether you are retired or not, this is the mandatory Medicare age and missing the enrollment period can result in a lifetime penalty surcharge when you do finally enroll. Regardless of your income and employment status, I recommend contacting the Social Security administration within 3 months of your 65th birthday, if only to say “Hey, I’m aware of the requirement even though I don’t think it applies to me right now.”  You’ll be glad you did if you later find out that your company doesn’t qualify as an exempt employer and now you get to pay the surcharge for the rest of your days.

Full retirement Age – This one is a moveable target and based on the year you were born.  Essentially, if you were born before 1954, your Full Retirement Age is 66 and if you were born after 1960, your FRA is 67.  For the years in between the FRA moves in 2 month increments from one age to the other.  Your Full Retirement Age is the age when your Social Security benefits are unreduced (as will be your spouse’s if they are going to take a spousal benefit, which is a whole other story….).

Age 70 – Just like age 62, where your Social Security benefits would be reduced, you enjoy a pretty reasonable annual increase for every year you wait to take your benefit up to age 70. Why wait?  Simple math – annual Cost of Living Adjustments on a larger number means more money. For example, if you take your benefit at age 62 and subsequently receive $1,276 (the national average for people who collect at age 62), your COLA is going to be about $40/month whereas if you wait until age 70, and your benefit is $1,963 (again the average), your COLA would be $62. Now that pensions have evaporated, every dollar counts when we are working to preserve your invested assets.

Age 70 ½ – By now, I think everyone knows that the Required Minimum Distribution (RMD) age as moved from to age 72 but, what didn’t move is the age when you can use your IRA assets to make charitable donations and not pay taxes on those dollars – Say what?!?!  There’s a way to avoid taxes legally that doesn’t require a high priced accounting team AND you can disclose your tax returns without fear of scrutiny, who knew…. OK, back on track…  If you donate the dollars directly from your IRA (and there is a very precise way of doing this), it isn’t considered a taxable distribution so if you are charitably inclined and over 70 ½, consider that as part of your annual tax planning.

Age 72 – The new-ish Required Minimum Distribution age which is the point where the IRS say “Hey buddy, you’ve had those investments pre-tax long enough – we want our dosh…”  Nope, you don’t have a choice and there is an incredibly hefty penalty if you don’t take your full RMD.  The IRS doesn’t care if you don’t need them to live on, all they care about is their tax dollars so you can see why, way back at age 55 (or earlier) I start talking about tax strategy with our savings.  Having the “yes, you are going to skip to a higher tax bracket because you were a good saver” conversation isn’t one I enjoy either.

Age 73 – And finally, if you celebrated your 72nd birthday on or after December 31, 2022 – congratulations! You have an additional year for that RMD planning. Congress is continuing to tinker on RMDs since the last SECURE Act updates and there will likely be a future age extension to age 75, but this is not in place yet. For those in your first year of eligibility, you have until April 1 of the following year to make a distribution.

There you go – a bit of a long one this week but hopefully you now have a good idea of the benchmarks to take into account as you plan your financial future.