Age Milestones As You Approach Retirement

There are many tax incentives to help you build financial security for retirement, but many government and employer-sponsored programs carry certain age restrictions governing when you can withdraw funds or access benefits without penalty. Two Federal agencies, the Internal Revenue Service (IRS) and the Social Security Administration (SSA), keep an eye on your birthday as you take advantage of valuable tax breaks and retirement benefits. Here are some important age milestones to consider:

Age 55. If you take “early” retirement, quit, or are otherwise terminated from employment, you can generally withdraw money from 401(k)s, 403(b)s, Simplified Employee Pensions (SEPs), Savings Incentive Match Plans for Employees (SIMPLEs), and profit-sharing plans without being subject to a 10% Federal income tax penalty for early withdrawals. You must meet the following qualifications: You must attain age 55 by December 31st of the year you leave the workforce; money must stay in and come from the employer’s plan and cannot be transferred to an Individual Retirement Account (IRA); early withdrawals are subject to the plan’s provisions; and only money from your last employer’s plan will qualify (not funds from previous employers).

Age 59½. Generally, you can withdraw money from qualified retirement plans and traditional IRAs after the age of 59½ without being subject to the 10% penalty tax, if plan-specific qualifications are met. Ordinary income tax will be due if your contributions were tax deductible. No income tax or penalty will apply to distributions from a Roth IRA provided you have reached age 59½ and have owned the account for at least five years.

Because traditional IRAs and Roth IRAs receive different tax treatment, the rules governing early distributions differ. Prior to age 59½, you may take early distributions from a traditional IRA without penalty, provided you receive “substantially equal periodic payments” or qualify for an exception. Qualified situations include paying for certain first-time homebuyer expenses, having unreimbursed medical expenses that total more than 7.5% of your adjusted gross income (AGI), being disabled, paying medical insurance premiums due to unemployment, and paying for higher education expenses.

Similar exceptions apply to Roth IRAs, but in addition to age, you must also consider how long you have owned your account. Nonqualified distributions occur when you access funds that have not been in the account for five years, and the tax implications depend on the source of the assets (i.e. from contributions, from a nontaxable conversion, from a taxable conversion, or from earnings). Because your contributions are made with after-tax dollars, those funds will never be taxed or penalized.

Age 60. Widows and widowers are eligible for Social Security benefits.

Age 62. Some companies may allow retirement at this age with full pension benefits. Moreover, this is the earliest age for receiving regular Social Security benefits, but the benefit will be permanently reduced.

Ages 62-65. The earnings threshold for those still working and collecting Social Security benefits is $16,920 in 2017. There is a $1 loss (a “give-back”) in benefits for every $2 earned above that amount. In addition, a portion of benefits may be taxed as income (based on a complex formula that includes wages and tax-exempt income).

Age 65. Many company pension plans provide full benefits at this age, and Medicare eligibility generally begins at 65. However, the “full retirement age to receive full Social Security benefits is slowly rising and will affect those born in 1943 and later. For example, full retirement age for those born between 1943 and 1959 rises incrementally until, for those born in 1960 and later, the age for receiving full benefits is 67. Those still working will be able to receive full Social Security benefits regardless of earnings, although some beneficiaries may find a portion of benefits may still be taxed based on a formula that includes wages and tax-exempt income.

Ages 66-67. The lower earnings threshold amount noted above still applies for years prior to full retirement age, and a second earnings threshold rule applies for the year in which full retirement age is attained. For those still working and receiving Social Security benefits, there is a benefit loss in 2017 of $1 for every $3 over $44,880 earned for months prior to attainment. The earnings threshold no longer applies once full retirement age is attained. A portion of benefits may be taxed as income (based on a complex formula that includes wages and tax-exempt income).

Age 70½. The required minimum distributions from a qualified retirement plan or traditional IRA must generally begin by April 1st of the calendar year following the year in which you reach age 70½. This rule applies to Roth 401(k)s, but not to Roth IRAs, which are not subject to mandatory distribution rules.