Posted by Jordon Rosen, CPA, MST, AEP®
You may or may not know your retirement date, or whether you intend to retire early or continue working as long as you can. What is important is that you begin your planning as early as possible and be aware of certain critical dates along the way. Below are some important dates to keep in mind.
Age 55: The 10% premature distribution penalty from qualified retirement plans does not apply if you separate from service during or after the year you turn age 55 and the plan allows for early distributions. The exception does not apply to self-employed individuals or to distributions from IRAs.
Age 59½: Distributions from both IRA and qualified retirement accounts can be withdrawn penalty-free. Surviving spouses who have not yet reached age 59½ should be careful when deciding to roll over a deceased spouse’s IRA or retirement account into their own IRA if they think they will need to draw on the account before reaching 59½, since such distributions would be subject to the 10% penalty; but rather should keep a portion in a “beneficiary IRA” accounts, since withdrawals from such account are penalty free.
Age 60: Widow(er) survivor’s Social Security benefits can be claimed based on the deceased worker’s primary insurance amount plus any additional credits accrued.
Age 62: Eligible beneficiaries can begin collecting reduced Social Security benefits. For an individual whose full retirement age (FRA) is 65, the reduction is 20% of the FRA benefit amount. If the individual’s FRA is age 66 or 67, the reduction is 25% and 30%, respectively. Spousal benefits would also be reduced. The reduction is permanent so the individual will not receive an increased benefit when they reach full retirement age.
Age 65-67: Depending on your year of birth, this is the age you will be considered at full retirement age (FRA) and be able to collect 100% of your Social Security benefit. Those born after 1942 will reach FRA at age 66 and those born 1960 and thereafter will reach FRA at age 67.
Age 65: You now qualify for Medicare. You generally have a 7-month window to apply for benefits without incurring a penalty. However, if you are otherwise covered by your employer or your spouse’s employer, you can delay applying until that coverage stops without a penalty. If you apply for Social Security benefits, you are automatically enrolled in Medicare Part A (it’s free). Medicare Parts B and D come with a monthly premium co-pay based on your income. Be sure to compare the cost of staying on your employer’s plan with the cost of being covered by Medicare (along with the cost of any supplemental coverage).
Age 70: You can delay taking Social Security benefits up until age 70 and accrue benefits of roughly 8% per year (maximum of 32%) for waiting; and begin receiving the increased monthly check for the rest of your life. This should be compared to starting SSA benefits at full retirement age or taking early distributions (see above) based on factors such as your health, family longevity history, employment status, and cash needs. By delaying the start of benefits to receive a larger payout starting at age 70, you would have to live to about age 82 to recapture the missed payments over the first 4 years.
Age 70½: You need to begin taking regular annual required minimum distributions (RMD) from your qualified retirement plan and from your traditional IRA beginning in the year you turn 70½. (RMD rules do not apply to Roth IRAs unless inherited). The first year’s RMD can be delayed until no later than the April 1st of the year after you turn 70½. If you delay the first year’s payment until year 2 however, you will still need to withdraw year 2’s RMD by December 31 of year 2, thus doubling up your income in the second year. The minimum distribution is just that – the minimum you need to take which is based on the IRS Uniform Life Table. Failure to take the minimum amount in any year will result in a 50% penalty of the deficiency!
If you have questions or want further information on the above or other income, retirement or estate planning techniques, please contact Jordon Rosen at firstname.lastname@example.org.