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7 Milestone Birthdays That Affect Your Retirement

September 2, 2009

Remember as a kid how excited you were for your birthday to come?  It couldn’t arrive fast enough!  Presents, cake and everyone making a big deal of you was great! 

You probably couldn’t wait to turn 13 and finally become a teenager.  Then maybe you looked forward to 16 so you could get your license.  18 to vote.  At 21 you could legally drink and 25 got you a discount on your auto insurance. 

After that, you may have spent the rest of your time wishing you were 25 again.

It’s in our nature to look forward to milestones.  After all, they are a rite of passage and a big achievement.

Did you know you’ve got some retirement milestones to look forward to?

Being unaware of these milestones will cost you money!

Photo by: Digital Donna

Milestone #1 – Age 50

In 2002, the government changed the rules on contributions to retirement plans and IRA’s.  They allowed a “catch-up” provision for older individuals.  If you are age 50 or older, you may now contribute an extra $1,000 to your IRA’s and an additional $5,500 to your 401k’s in 2009. 

This is a great deal for those looking to sock some extra cash away for retirement!

Milestone #2 – Age 55

Age 55 is a big deal for those looking to retire early for the simple fact that if you retire or separate from service the year you turn 55 or after, you are allowed to take 401k distributions without getting whacked with a 10% penalty! 

Let me say that again…NO PENALTY for early retirement distributions.  This is known as the “Age 55 Exception”. 

Get this – if you roll your money to an IRA, the deal is off the table.  That’s right, you must leave it in the 401k, but you are allowed to take out as much as you want, whenever you want.

Milestone #3 – Age 59 1/2

I doubt most of you celebrate Half Birthdays, but this is one you’ll want to throw a party for!

This is the traditional age in which you can withdraw your retirement money without fear of Uncle Sam hitting you over the head with a 10% penalty for pre-mature distributions.

Milestone #4 – Age 62

62 is a big age as well for the simply because you can now qualify for Social Security benefits.  It doesn’t mean you have to take them or even that you should take them, but you at least have the option available to you.  Don’t forget it will be a reduced benefit, but a benefit nonetheless.

Milestone #5 – Age 65

At this age you are now qualified to take Medicare, which is social insurance including two main parts.  Part A covers hopsitalization and Part B acts as your medical insurance. 

If at this point you are not receiving Social Security benefits then you need to apply for Medicare and will want to do that three months before you turn 65.

Milestone #6 – Age 66-67

If you were born between 1943 and 1954 then your full retirement age (FRA), or the age in which you can collect 100% of your entitled Social Security benefits is age 66. 

For those born in 1955 you have to wait an additional two months.  The government adds two more months to the waiting period for each year until 1960 (i.e. if you were born in 1958, your FRA is age 66 and 6 months). 

If you were born in 1960 or beyond your FRA is age 67. 

I hear a lot of people tell me “I can’t retire until 67”.  What they usually mean is they can’t collect full Social Security benefits until age 67.  You can retire whenever you want, you just won’t get your full benefits until then.

Milestone #7 – Age 70 1/2

Here is another one of those Half Birthdays, however, this one doesn’t justify much celebration.

In the year you turn 70 1/2 good ol’ Uncle Sam says you MUST start pulling money out of your IRA’s or 401k’s. 

What? Surely that’s a typo right?  Sorry to bear bad news, but you MUST start pulling money out of your retirement plans. 

In effect, Uncle Sam says to you, “Great job saving that big chunk of money in your 401k and deferring the taxes for all these years, we love you, now it’s time to pay the Piper, which is why we love you even more at this age!”

What do I mean by MUST?  Well, if you want to try to get around pulling money out and paying taxes on it, just realize that you will be subject to a 50% penalty on your distribution!!  Ouch!

This is known as RMD or Required Minimum Distributions.  There is a special formula based on life expectancy that the IRS uses to determine your RMD.  See these worksheets at the IRS website for more info.

One last note on the 70 1/2 rule.  This only applies to your pre-tax retirement accounts.  In other words, money that you have not previously paid taxes on.  So, your Roth IRAs (which consist of after-tax money) do not apply when discussing RMDs. 

So What.

Now that you know about these important milestones what should you do about it? 

If you are unsure how much you need for retirement and are trying to decide where to save more money you may want to keep the 70 1/2 rule in the back of your mind.

Regardless of age, it makes sense for you to look into whether a Roth IRA is right for you.  You might be able to contribute to them OR you might be able to convert existing pre-tax money to a Roth IRA.

If you are 50 or older that’s easy – you should be socking away as much as you can for your retirement.

If you want to retire early you might be able to take advantage of the age 55 exception and early Social Security Benefits.

Knowledge is key to making the right decisions when it comes to retirement.  Don’t let your birthdays come and go without taking advantage of opportunities that exist for your retirement.


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9 Comments leave one →
  1. EvolutionOfWealth permalink
    September 2, 2009 6:02 pm

    I just want to clarify. At milestone #2 the “Age 55 Exception” falls under rule 72t. It allows a lump sum distribution from your 401k without the 10% early withdrawal penalty when a seperation of service occurs at age 55 or later. That’s it, only lump sum and only with a seperation of service.
    However, also under rule 72t is the periodic and equal distributions can be taken from an IRA account at age 55 or later without the 10% early withdrawal penalty. The IRS has a formula for the calculation of this distribution method. This cannot be done from a 401k.

  2. September 2, 2009 8:15 pm

    Hey Evolution of Wealth, I appreciate your comment. I’ll have to respectfully disagree with you however.

    The lump sum distribution could be a requirement found in the Summary Plan Discription from your employer – they might put their own restrictions on it, but the IRS does not.

    This is from Publication 17 on the IRS website:

    Additional exceptions for qualified retirement plans. The tax does not apply to distributions that are:

    From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees), ”

    It puts no stipulation whatsoever on how the money is withdrawn. You can take as much, as little or even periodic withdrawals from an IRS standpoint.

    Also, Ed Slott – known as the IRA Guru – says this at his website

    “they can be stopped anytime as far as the IRS is concerned. There are no tax code rules. However, the plan might have some stipulation that the monthly withdrawals must be taken for a certain time after you start them. That would be a plan requirement and have nothing to do with any IRS requirement.”

    Basically, you’ll want to check with your employer to make sure they allow this, but most of the time they do. The IRS doesn’t care how you take it.

  3. Evolution Of Wealth permalink
    September 2, 2009 8:36 pm

    I stand corrected.
    So then the benefits of the 401k are that you would have more flexibility of withdrawals if and only if you seperated service after age 55.
    Otherwise, the only penalty free access before age 591/2 is through IRA rule 72t distributions using one of IRS calculation methods. That once started need to be continued to age 59 1/2.
    Fair enough?

    • September 2, 2009 9:37 pm

      Yeah, you HAVE to be at least turning 55 in the year you retire to make this work.

      But the benefits are huge because you have total flexibility and can tap the money whenever you need it rather than be locked in to a 72t distribution schedule.

      Thanks for the comment and forcing me to back up my post! Nice job. I need that once in a while =)


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