A lot has changed since the Social Security Administration set the retirement age at 65 in 1935. The average life expectancy for a person born in 1930 was only 60. The life expectancy for Americans today is 78. Those turning 65 now are expected to live to 85, and one in three 65 year olds will live past age 90.As retirements have evolved, so have the guideposts that mark the way through the golden years.
Most of us are familiar with the early retirement milestones where benefits begin. Below, we highlight six important ages on the retirement path and take a closer look at managing the potential pitfalls of required minimum distributions (RMDs). As part of the SECURE Act, the age requirement for RMDs was raised to 72, which applies to those who turn 70 ½ in 2020 or later.
The CARES Act waives certain RMDs during 2020. For more information on the CARES Act, please click here.
Retirement Milestones by Age
Age 59 ½: Penalty-free withdrawal
Generally, owners of a qualified retirement account, such as a 401(k), who take withdrawals before the age of 59 ½ must pay income taxes on the withdrawal, including an additional 10% tax penalty for the early withdrawal. Owners of a qualified retirement account who take withdrawals after the age of 59 ½ must still pay income taxes on the withdrawal, but no longer have to pay the 10% additional tax penalty.
Age 62: Social Security eligibility
You are eligible to claim Social Security, but benefits are reduced if taken prior to full retirement age. For more information on Social Security eligibility, visit https://www.ssa.gov/.
Age 65: Medicare enrollment
Medicare eligibility begins at 65, and enrollment is open during a seven-month period that begins three months before turning 65. Timely enrollment is important, as a premium penalty of 10% for each 12-month period of eligibility may apply to late enrollments. This enrollment period applies regardless of whether a person is retiring at 65. For more information about Medicare enrollment, visit https://www.medicare.gov/
Age 66-67: Retirement age
Full retirement age depends on a sliding scale from whether you were born in 1960 (67) or between 1943 and 1959 (66+10 months).
Age 70: Maximized Social Security benefits
Social Security claims delayed past full retirement age receive monthly credit that permanently increases the Social Security benefit. After age 70, it is no longer financially beneficial to delay the benefit.
Age 72: Required minimum distributions
By delaying taxes on money in a tax-deferred retirement vehicle, your funds grow faster than a taxable account, allowing for increased assets and lower taxable income. To ensure money is eventually taxed, the IRS requires annual withdrawals from tax-deferred accounts as of a designated age. RMDs are withdrawn each year and are included as taxable income along with any other income generated in retirement, except for any income that was previously taxed.
For anyone who turns 70 ½ on or after Jan. 1, 2020, RMDs begin at the age of 72. Generally, the initial RMD must be taken no later than April 1 the year after turning 72, and subsequent RMDs are due by Dec. 31 each year. This means retirees who wait to take their first RMD the following April 1 will need to take two taxable distributions in the same year. The price for not satisfying an annual RMD requirement can be costly, up to a 50% penalty on top of original income tax amount.
It's important to note, the IRS has rules on calculating RMDs. These are unique to each situation, but they are based on the following factors, including the value of the amount on Dec. 31 of the previous year, divided by the IRS's life expectancy factor. This factor is found on tables published by the IRS, such as the most commonly used Uniform Life table. It is important to note the life expectancy factor decreases with age, resulting in a growing RMD.
Between withdrawals and taxation, RMDs can put a strain on your retirement income and taxation strategy. Any planning done now to prepare for these distributions can ease undue burden later in life. The IRS.gov site has helpful resources for calculators and deadlines. Speak with a tax or financial expert to help you manage your RMDs and minimize tax consequence.
A lot of emphasis is put on planning and preparing for retirement, but there are important milestones to keep in mind to help protect assets and maximize benefits. Talk to your financial or tax professional to learn more about how these age requirements may impact you and better prepare you for the milestones ahead.
The content provided is for informational purposes only and does not constitute advice. For specific details on how this may apply to your personal situation contact your personal financial advisor or insurance agent for more details. American Equity contracts are only sold through independent agents. Please contact your state insurance department to see if there is an independent insurance agent in your area appointed to sell American Equity annuity contracts.
American Equity Investment Life Insurance Company® does not offer legal, investment, or tax advice. Please consult a qualified professional.