Each type of retirement benefit has a different eligibility age. Your age plays a big role in how much you can expect to receive from Social Security and what you need to do to avoid retirement account penalties. Remember to factor these important ages into your retirement plan.
Age 49 and under
Workers who begin to save for retirement early in their career are best able to take advantage of compounding investment returns. Saving in a retirement account can additionally qualify you for tax breaks and employer contributions. The 401(k) contribution limit is $19,000 in 2019. Workers can also deposit up to $6,000 in a traditional or Roth individual retirement account. "Roth accounts typically favor younger employees.
The idea is to pay tax now at a lower rate, given your wages are expected to increase, and then have your investments grow tax-free," says Rick Vazza, a certified financial planner and president of Driven Wealth Management in San Diego. "Using the traditional component of an account may be more appropriate for individuals already in peak earning years. Theoretically, they can avoid the tax in the currently high earning years, and pay the tax at a potentially lower tax rate in retirement."
Beginning at age 50 you can ramp up your retirement account contributions. Employees age 50 and older can make 401(k) catch-up contributions of up to $6,000, for a maximum possible 401(k) contribution of $25,000 in 2019. Those age 50 and up can also deposit an extra $1,000 in an IRA, or $7,000 in total for 2019. "The increase to the contribution limit is fantastic for those who can take advantage of maxing out those contributions," says Laura Morganelli, a certified financial planner for Abacus Wealth Partners in Philadelphia.
Making catch-up contributions allows older workers to tuck additional money into retirement accounts and qualify for a bigger tax deduction in the years leading up to retirement.
If you leave your job in the year you turn age 55 or older, you can take penalty-free 401(k) withdrawals from the account associated with your most recent job. However, if you roll your 401(k) account balance over to an IRA, you will need to wait until age 59½ to take IRA withdrawals without penalty.
The 10 percent early withdrawal penalty on IRA withdrawals ends at age 59½. However, traditional IRA distributions are not required until after age 70½. Income tax will be due on each withdrawal from your traditional IRA.
Retirement time frame
You can begin collecting your Social Security payments at age 62. However, your monthly payments will be reduced if you begin payments at this age. "If your full retirement age is 67 and you retire at 62, you are looking at a 30% per month reduction," says Alexandra Baig, a certified financial planner at Companions On Your Journey in Brookfield, Illinois. Also, if you work after signing up for Social Security, your benefit checks could be temporarily withheld if you are paid more than the annual earnings limit.
"If you retire before your full retirement age and continue to work and earn more than $17,640 per year, for every $2 above this amount, Social Security will reduce your benefit by $1," Baig says. Once you reach your full retirement age, your Social Security benefit will be recalculated to give you credit for the benefit withholding and your continued earnings.
Medicare eligibility begins at age 65. You can first enroll in Medicare during a seven-month period that begins three months before the month you turn 65. Take care to sign up on time, because your Medicare Part B premiums will increase by 10 percent for each 12-month period you were eligible for benefits but did not enroll.
If you delay enrollment because you or your spouse is covered by a group health plan at work, sign up for Medicare within eight months of leaving the job or health plan to avoid the penalty.
Baby boomers born between 1943 and 1954 qualify for their full Social Security benefit at age 66. The Social Security full retirement age gradually increases from 66 and two months to 66 and 10 months for those born between 1955 and 1959.
For example, the full retirement age is 66 and six months for people born in 1957. Once you turn your full retirement age, you can work while receiving Social Security benefits without having any of your payments withheld.
The Social Security full retirement age is 67 for workers born in 1960 or later. Millennials and younger generations need to wait until age 67 to qualify for their full Social Security benefit.
You can boost your Social Security payments if you delay claiming your benefit between your full retirement age and age 70. Social Security payments increase by 8 percent for each year you wait to start your payments. After age 70, there is no additional benefit to waiting to sign up for Social Security.
"If you wait until after full retirement age to claim your retirement benefit, the amount you receive will be greater than your primary insurance amount," says Mike Piper, a certified public accountant and author of "Social Security Made Simple." "The increase is 2/3 of 1% of your primary insurance amount for each month you wait beyond full retirement age up to age 70, beyond which there is no increase for waiting."
People age 70½ and older are no longer eligible to get a tax deduction for contributing to a traditional IRA. Instead, those over age 70½ are required to take annual withdrawals from 401(k)s and traditional IRAs and pay the resulting income tax bill. The penalty for missing a required minimum distribution is a stiff 50 percent of the amount that should have been taken out. Your first distribution must be taken by April 1 of the year after you turn 70½. After that, annual withdrawals are due by December 31 each year.
Those who delay the first withdrawal until April will need to take two distributions in the same year, which could result in a big tax bill that year. However, if you continue to work after age 70½ for a company you don't own, you can delay 401(k) withdrawals from the retirement account at that job until you actually retire. Roth IRAs don't have withdrawal requirements in retirement.