Manage Your Retirement Income with
the Critical Ages in Mind
By Shane Flait © 2009
Certain ages are
critical when managing our
retirement plans. Failure to plan
with those ages in mind can produce
lost benefits. In this article I
outline those dates and explain how
they affect your retirement
benefits.
You’ve saved for years to accumulate
benefits to use throughout your
retirement years. Most likely you’ve
used government-regulated plans –
called qualified retirement plans,
company plans, IRAs, etc. – to do
so.
But these tax-advantaged retirement
savings plans have rules you must
follow - both for companies and
individuals. These rules prescribe
key ages to frustrate early use of
those savings and then to force
their use later in retirement. You
also paid into the Social Security
and Medicare programs; they also
have their key ages.
Being aware of these ages and what
they imply is critical to your
retirement planning. Let’s explore
them from the earliest to the
latest:
Let me first mention that most
tax-advantaged savings plans involve
tax deductible contributions you
make from your working income. These
savings then grow tax deferred. When
this money is eventually withdrawn,
it’ll be taxed as ordinary income.
Such plans also include company
pension plans – all of which are
produce taxable income at
retirement.
There are also ‘Roth’ based plans
(Roth IRA, Roth 401(k), etc.) that
you contribute to only with
after-tax working income. These
savings grow tax-free – a clear
tax-advantage. And when you withdraw
from them, the money comes out tax
free.
The government offers the
opportunity for using such
tax-advantaged savings/retirement
plans as an incentive for people to
save for their retirement – and to
lessen their dependence on Social
Security benefits. So government
sets up rules to penalize early
withdrawals from these plans, and
more… Let’s check out the rules – by
age:
Age 50 – Catch-up age for
additional contributions to
retirement plans
The earlier you can begin
contributing to your retirement, the
better. All tax-advantage retirement
plans have limits on how much you
can contribute yearly. But when you
reach 50 years old, as an added
incentive you can contribute a
little more - called ‘catch-up’
contributions. Keep current each
year for increases in both the
regular annual contributions and
catch-up amounts.
Age 59½ and age 55 - Age for no
more 10% penalty for early
withdrawal:
To frustrate early withdrawal of
retirement savings, our government
imposes a 10% penalty tax on what
you withdraw before you turn 59½.
But the government has lowered that
age to 55 only for those laid off
from work so they can access their
company plan benefits.
Of course, anything you take out of
these plans is treated as taxable
income (except for Roth plans) so
the 10% penalty is imposed in
addition to whatever income tax
you’d pay.
Age 65 - Age you qualify for
Medicare
You must wait until age 65 to
qualify for Medicare. This is a
government-assisted health care
system to help the elderly. You must
apply for it to receive it. Apply 3
months before turning 65 so you have
access to it on your 65th
birthday.
Age 65 or your FRA and (62 to 70) –
Social Security Retirement Ages
Sixty-five has long been the
official retirement age for
business, Social Security, and
Medicare benefits. And it still is
for Medicare eligibility. But future
insolvency problems with Social
Security has made it mandatory to
slowly increase the retirement age
to receive your full Social Security
benefits (i.e. income). The age at
which you get your full Social
Security benefits is called your
full retirement age (FRA). It’s been
slowly increased to 67 depending on
the year in which you were born.
Everyone can receive Social Security
benefits earlier than their FRA, but
their (i.e. the income) is reduced
from what you’d get if you waited
until your reached your FRA. This
reduction increases for each month
you begin benefits before your FRA.
Generally, age 62 is the earliest
you can begin receiving your
permanently ‘reduced Social Security
income’
On the other hand, government
rewards you by increasing your
Social Security income beyond your
FRA benefits for each month you
delay receiving them beyond your FRA.
However, no additional benefit is
given for waiting beyond age 70.
Age 70½ - After turning this you
have minimum required distributions
(MRDs) annually
Lastly, the government wants the tax
money for all that ‘untaxed’
retirement plan money you’ve saved.
So when you turn 70½, they require
you to withdrawal at least a minimum
required distribution (MRD) from
your plans annually.
Remember that all the withdrawals
are taxed as ordinary income. If you
withdraw less than your MRD, you’ll
be penalized heavily on the fraction
of the MRD you didn’t withdraw. So
do it; it’s not worth it not to.
Incidentally, Roth plans have no MRD
obligations for you. And whatever
you take out is tax free too.
Shane Flait is a writer and
educator. See more at
www.EasyRetirementKnowHow.com
