Navigating Age Milestones in Financial Planning: Your Path to a Secure Future
Embarking on the journey of financial planning and saving for retirement is an exciting and important endeavor. Just like any voyage, there are specific milestones along the way that require your attention and action. These age milestones play a vital role in shaping your financial landscape and ensuring a comfortable retirement. In this article, we will explore the key age milestones and the actionable steps you can take at each stage to navigate the path toward a secure future.
Age 18 - 21: Age of Majority for Custodial Accounts
When the child of a UTMA or UGMA reaches the age of majority in their state, the account will need to be retitled in the name of the new young adult and the custodian, or parent, would need to remove control.
Age 24: The End of “Kiddie Tax”
This is the age when the “kiddie tax” no longer applies on certain dependents’ unearned income.
Age 26: Adult Children are Removed from Parent’s Health Insurance
This is the last year that the young adult is able to stay on their parent’s health insurance plan. It is time to shop for an alternative through the marketplace or through their own employer’s health insurance plan.
Age 30: Coverdell Distributions
Although less common with the much higher contribution limits available in 529 plans, those who have Coverdell Education Savings Accounts must have fully distributed them by age 30.
Age 50: Catching Up and Expanding Options
When you reach age 50, there are additional opportunities to boost your retirement savings. It's like finding an alternate route that allows you to make up for lost time. Maximize catch-up contributions to your retirement accounts, such as 401(k)s, Traditional, Roth, and SIMPLE IRAs, to take advantage of higher contribution limits. Explore the option of a "catch-up strategy" with your financial advisor to bridge any savings gaps.
Age 55: Flexible Retirement Options
At age 55, a new set of options becomes available. If you have separated from service, you can make penalty-free withdrawals from your 401(k) or similar employer-sponsored retirement plans without the 10% early withdrawal penalty. This is like unlocking a door that gives you more flexibility and control over your retirement funds. Evaluate whether this option aligns with your retirement plans and financial needs within the context of your entire retirement plan.
Age 59½: Penalty-Free Access
Once you reach age 59½, you can start making penalty-free withdrawals from your retirement accounts, including IRAs and 401(k)s, without facing early withdrawal penalties. This milestone opens up avenues for accessing your hard-earned savings and enjoying the fruits of your labor. Consider your income needs and withdrawal strategies to ensure a sustainable income stream throughout retirement.
Age 60: Surviving Spouses Have Social Security Options
Surviving spouses are eligible to receive reduced Social Security Survivor benefits. Be sure to evaluate the impact and affordability of filing early. It comes with a reduction in your benefits and will be an important consideration in the context of your entire retirement income picture.
Age 62: Social Security Considerations
At age 62, you become eligible to claim Social Security benefits. However, it's important to note that claiming benefits before your full retirement age may result in a reduction in monthly payments. This is like reaching a junction where you must weigh the benefits of claiming early against the potential trade-offs. Evaluate your financial situation and consult with a financial advisor to determine the optimal timing for Social Security claiming based on your unique circumstances.
Age 63: Two-Year Lookback for Medicare Premium Begin
Income reported on your tax return is used to determine your Medicare part B and part D premiums. This is known as the two-year lookback and will be an important consideration in effectively managing your income and tax planning strategies going forward. Higher premiums will apply at higher income levels.
Age 65: Medicare Enrollment
At age 65, you become eligible for Medicare, which provides essential healthcare coverage during retirement. Just like crossing a bridge that leads to comprehensive healthcare, it's important to understand the enrollment process and available options. Research Medicare plans, including Parts A, B, and D, and consider supplemental insurance to address potential gaps in coverage. In addition, taxpayers receive an additional tax savings benefit through the increase in their standard deduction.
Age 67: Full Retirement Age for Individuals Born 1960+
This is the Full Retirement Age (FRA) for those born in 1960 or later to receive Social Security benefits without a reduction.
Age 70: Maximum Social Security Benefits!
Filing for Social Security benefits at age 70 means that you have extracted the maximum monthly benefit through delayed credits. For every year that you have waited to file, you received an additional 8% boost to your Social Security income benefits. Delayed credits do not apply to spousal or survivor benefits.
Age 70½: Qualified Charitable Distributions Offer Additional Tax Planning Strategies
At this age, you are eligible to use the qualified charitable distribution (QCD) to distribute up to $100,000 (indexed for inflation starting in 2024) tax free from an IRA. This can be a good strategy for someone who is charitably inclined and has large balances in qualified retirement plans. Those future Required Minimum Distributions, or RMDs, will generate additional income, and taxes when Required Minimum Distributions commence.
Age 73: Required Minimum Distributions Begin
Once you reach age 73, you must start taking Required Minimum Distributions (RMDs) from your traditional IRAs and employer-sponsored retirement accounts. These withdrawals ensure compliance with IRS regulations and help fund your retirement lifestyle. Exceptions apply where the individual is still working participating in their plan, and meet certain criteria. Think of it as crossing a milestone that signifies the transition from accumulation to distribution. Work with a financial advisor to calculate your RMDs and develop an income planning and tax planning strategy that aligns with your financial goals.
Age 75: RMDs for those born 1960+
Required Minimum Distributions begin for those who were born in 1960 or later.
Planning Opportunities:
It is important to consider how these age milestones may benefit or limit certain planning strategies.
Roth Conversions: The timing of Roth IRA conversions is key when it comes to tax planning and reaching certain age-based milestones. Consider the impact of your retirement date, Social Security filing, the two-year Medicare lookback, and Required Minimum Distributions along with other income sources to determine a tax strategy that considers both your current tax rate and potential future tax rates.
Qualified Charitable Distributions: If you do not plan to rely on an RMD to meet your income needs, donating IRA assets to a qualified charity will allow you to donate up to $100,000 tax-free each year.
Take Distributions Before RMD Age: With the change in RMD age to 73 in 2023 and eventually age 75 in 2033, you may want to consider accelerating income before tax rates expire at the end of 2025 to “fill up” more favorable tax brackets. This would depend on your personal circumstance and a financial or tax advisor can help you analyze and evaluate various strategies.
Navigating the age milestones in financial and retirement planning is akin to embarking on a journey with various signposts along the way. Each milestone represents a critical opportunity to make informed decisions and take action that will shape your financial future. Remember to continuously evaluate your goals, adjust your strategies, and seek guidance from financial professionals to ensure you're on track. By embracing these milestones and actively participating in your financial journey, you can create a solid foundation for a secure and fulfilling retirement.
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Cassandra Smalley, CFA, CFP® is a fee-only financial advisor for women business owners located in St. Petersburg, FL, and works virtually with clients across the US.
