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.
Age 50-Investing
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).
Age 55
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.
Age 65
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.
