My parents taught me to respect my elders. As I get older, it’s getting harder and harder to find anyone more elderly than I. However, there are some advantages to ageing (other than the obvious one of a longer life span). I thought I would mention just a few in this blog.
Unfortunately, many Americans have not saved adequately for retirement. Because of that, contribution limits for certain qualified plans have been increased for those persons age 50 or older. These “catch up” provisions are designed to allow individuals to save more in the years before they retire. Persons age 50 and older can contribute as much as $23,000 of their pre-tax pay into a 401(k) or 403(b) plan; that’s $5,500 more than allowable contributions for younger individuals. An additional $1000 is allowed for contributions into an IRA or Roth IRA ($6,500 per year vs. $5,500 for younger individuals).
Normally, withdrawals from an employer qualified plan prior to age 59 ½ are penalized for premature distribution (10% penalty plus ordinary income tax). There is an exception for employee’s age 55 that leave their employer (retire, are laid off, or quit). Those employees may access their qualified plans without the premature penalty. Note that this exception does not apply to IRAs so there are rollover planning considerations here. Not converting to a self-directed IRA would allow the departing employee to access their funds without the premature distribution penalty.
At age 55, people may also contribute an additional $1000 (in 2014) into health savings accounts.
Age 59 ½
At 59 ½, individuals are free from penalties for withdrawing from most retirement plan accounts (IRAs, employer retirement accounts if you are no longer working, annuities, etc.). Also, at 59 ½, moneys converted from a traditional IRA to a Roth IRA are no longer subject to the requirement of staying in place for five tax years or being subject to a penalty.
At 65, you can make nonmedical withdrawals from a health savings account without the 20% penalty. The money is taxable but it grew tax deferred from the date of contribution.
Another big consideration is Medicare eligibility with the associated required costs for many individuals. There are planning considerations that are required at this age as you begin your Social Security/Medicare arrangements.
Age 70 ½
At 70 ½, you reach the age of required minimum distributions (RMDs) from IRAs and most employer retirement plans. The IRS has allowed tax deductible contributions and tax deferred growth in such plans; now it’s time to “pay the piper.” There is a mandated rate of withdrawal required from qualified plans beginning at this age; failure to withdraw that amount will result in ordinary income taxes plus a 50% tax penalty on the amount that should have been withdrawn.
A popular tax break in 2013 allowed individuals who have RMD requirements to make charitable contributions from their RMD amount directly to a church/charity with no tax consequences. There is no tax deduction for the amount donated but that amount is not included in taxable income. Although currently expired, there is a general expectation that this provision will be reinstated for 2014.
What to Do?
While we at Paragon Financial Advisors do not prepare taxes, we can help our clients plan their financial affairs to minimize tax consequences while attaining financial goals. Individual circumstances should be reviewed with your tax professional. By the way, don’t forget to ask for the “senior discounts” allowed by restaurants, hotels, airlines, etc. Ages for these may vary with the business involved. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.