It’s called the retirement planning opportunity zone.
It’s the zone – starting with age 50 and going to age 72 – where retirement and tax planning opportunities abound, said Dana Anspach, CFP, RMA, founder of Sensible Money and the instructor of the How to Plan for the Perfect Retirement course.
“During this period of time, all kinds of things are changing,” she said. “You have Social Security and Medicare and the opportunity to withdraw from retirement accounts, you have the earnings limit, and all of these things are kind of mixing and mashing together. And amazingly enough, they create planning opportunities, particularly when it comes to taxes and figuring out how to maximize your retirement cash flow.”
So, what are the ages to know?
Dana Anspach, CFP, RMA
Ages 50 & 55
Most people think of age 59 1/2 as the earliest that they can withdraw from qualified retirement accounts without paying a 10% penalty tax, said Anspach.
But workers who retire the year they reach age 55 or after can access retirement funds early without being subject to the penalty. Note: This rule applies to funds in the plan from the employer you retired from. If you roll funds out of the plan, this rule does not apply. This rule also does not apply to plans from former employers.
This rule also applies at age 50 for public safety workers who qualify.
“This can be law enforcement, firefighters, Border Patrol, certain customs officials and air traffic controllers,” said Anspach. “So, for a certain group that falls under that classification, age 50 is when the real planning opportunities start.”
This is particularly so, she said, for law enforcement and firefighters who start their careers at a young age and might be eligible to retire at 50 and not know that they have access to those funds.
Age 59 1/2
At age 59 1/2, you can withdraw from retirement accounts such as a 401(k), 403(b), 457 and with no penalty tax. Income taxes still apply. And restrictions may apply to withdrawals from plans from your current employer.
“You still pay ordinary income taxes on the withdrawal but not the penalty tax,” said Anspach. “However, if you are still working for the employer and most of your money is in that employer plan, the employer may restrict your access.”
Widows/widowers become eligible for Social Security’s survivors benefit at age 60 but will be subject to earnings limit if they are still working, said Anspach.
“Now it may not make sense to begin at that age,” she said.
But for some people who don’t have any other choice, it might sense, though the benefit will be reduced because they are collecting early.
Age 62 is the earliest age workers can claim Social Security. You will receive a reduced benefit for claiming early and the earnings limit applies if you are still working, said Anspach.
In most cases, Anspach said it doesn’t make sense to collect at 62 if you’re still working. “You want to wait until your full retirement age, which is based on your year and month of birth,” she said.
“We think of Medicare as beginning at age 65,” said Anspach.
But your Medicare Part B and Part D premium at age 65 is based on your age 63 tax return. And if your modified adjusted gross income is above a certain amount, you may pay an income related monthly adjustment amount. Medicare uses the modified adjusted gross income reported on your IRS tax return from two years ago.
“Now there are seven reasons you can request a reconsideration and retiring is one of those reasons,” said Anspach.
So, if you were working at 63 and you’re no longer working at 65 you can request a reduction in your income-related monthly adjustment amount. Use Form Medicare Income-Related Monthly Adjustment Amount – Life-Changing Event.
Medicare eligibility begins at age 65. Typically, said Anspach, you would enroll in Medicare Parts A and B, unless you’re employed by a company with more than 20 employees, in which case you’ll need to check with your benefits department to see if your employer-provided coverage will continue as your primary insurer.
Full retirement age (FRA) is the age at which you would get 100% of your primary insurance amount, said Anspach. The FRA varies based on the year and month of your birth. The good news: After this age, the earnings limit no longer applies.
“So, you can collect your Social Security benefits at full retirement age and continue to work and earn as much as you’d like,” she said. “And there is no reduction because of earnings.”
Of note: If you:
file a federal tax return as an “individual” and your combined income is:
– between $25,000 and $34,000, you may have to pay income tax on up to 50% of your Social Security benefits.
– more than $34,000, up to 85% of your benefits may be taxable.
file a joint return, and you and your spouse have a combined income that is:
– between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits.
– more than $44,000, up to 85% of your benefits may be taxable.
Age 70 is when you get the very most Social Security, said Anspach. Read Delayed Retirement Credits.
According to Anspach, it can make sense for many high-income, white-collar workers, for whom longevity is typically longer and who might have access to better health care, to wait until age 70 to apply for Social Security.
And that’s especially so for couples. “You want the highest earner to wait till 70 to begin Social Security because that maximizes the survivors benefit,” Anspach said.
There is, however, no point in waiting beyond 70, she said. The benefit increase stops when you reach age 70.
Required minimum distributions (RMDs) from your, 401(k) and 403(b) begin and you must take money out each year according to an IRS formula. “The only exception is if you are still working and it applies to the 401(k) plan for the employer you work for,” she said. “You may be able to delay those required minimum distributions.”
Be prepared, however, for your tax bill to rise once you start taking RMDs. Be prepared for your Social Security benefits, which, if prior to age 72 weren’t taxed, may now be taxed as well. “It can certainly catch you off guard,” said Anspach. “So, you need to be prepared to withhold enough or hold back enough to make quarterly payments.”
Anspach also noted that tax planning opportunities abound for years with low to no earned income. Look for opportunities to realize long-term capital gains at a zero percent rate, take withdrawals from your retirement accounts at the 22% or lower rate, convert to Roth IRAs possibly up to the 24% rate, and qualify for ACA subsidies during the pre-age 65 years.