Age-Based Tax Planning

RFA is here to help you navigate all the important decisions outlined below:

  • Age 50

    Catch-Up Contributions Allowed for Both 401(k) and IRA

    Did you know that beginning when you turn 50, you may contribute up to the regular 401(k) limit—$19,500 in 2020—and, if you reach that limit, you may also make a catch-up contribution of an additional $6,000? This provides an amazing opportunity to set aside an extra $6,000 annually into a tax-deferred retirement account, which can have a big impact on the eventual balance of the account!

    In addition, individuals 50 or older may also make catch-up contributions of $1,000 to their IRAs. This amount is in addition to the regular contribution limits for both traditional and Roth IRAs, set at $6,000 in 2020.

  • Age 55

    Some 401(k) Distributions Allowed

    Under normal circumstances, distributions from a 401(k) must wait until you reach the age of 59 ½. However, there is a special provision in 401(k) plans for those that leave their employer after age 55 but before age 59 ½. This rule allows withdrawals from the plan that are exempt from the early withdrawal penalty of 10%.

    Be aware should someone suggest that you roll funds from your 401(k) over to an IRA without first explaining the age 55 provision to you. Once funds are moved from your 401(k) to an IRA, the age 55 penalty-free withdrawal provision no longer applies, and you’ll have to wait until age 59 ½ to take withdrawals or pay the 10% penalty.

  • Age 59 ½

    IRA and 401(k) Distributions Allowed

    Under IRA tax rules, the earliest you can begin withdrawing funds from your IRA without penalty is at age 59 ½. However, that doesn’t mean you must—or even should—withdraw money. Many people wrongly assume that they must start drawing down their IRA once eligible. However, if you are still earning an income at 59 ½, best practice is likely to not touch that money and allow further growth.

  • Age 60+

    Potential IRA to Roth IRA Conversions

    It’s important to remember that regardless of when you choose to distribute funds from your traditional IRA, those funds are reported as ordinary income in the year in which they are distributed.

    For many, there is an opportunity to convert those funds to a Roth IRA. Here are two reasons that a Roth conversion might be advantageous for you:

    • Tax Exempt Earnings – After the conversion, funds deposited into the Roth IRA will grow tax-exempt rather than tax-deferred.
    • Decreased Future Required Minimum Distributions (RMDs) – By decreasing your traditional IRA balance prior to the age of 72*, you’ll reduce the amount of the RMDs you’ll have to take later.
  • Age 62

    Social Security Eligibility Begins

    Social Security benefits are an integral part of retirement planning. Understanding the procedures and details of the filing will prove critical to successfully planning your retirement income stream. How and when to begin taking Social Security benefits can be a difficult decision. Here are just some factors you’ll want to consider:

    • Existing savings
    • Current income
    • Health

    It’s also important to understand that Social Security benefits are not free money.

  • Age 65

    Medicare Enrollment Begins

    Medicare is the health payer program of the United States government that helps provide payment coverage for health and medical care. It was first enacted in 1965 to help those who could not afford health or medical care in their retirement. Today, millions of American citizens 65 and older receive Medicare assistance. The initial enrollment period (IEP) is the seven-month period that begins three months before you turn 65, includes the month of your 65th birthday, and ends three months later.

    If you do not enroll during the IEP when you are initially eligible, you can enroll during the general enrollment period that runs January 1 through March 31 each year. Be mindful that you may have to pay a late enrollment penalty for Medicare Part A and/or B if you did not sign up when you were initially eligible.

  • Age 72*

    Required Minimum Distributions (RMDs) Begin

    While the primary benefit of most IRS-sanctioned retirement accounts is their tax-deferred status, this benefit does not last forever. You must begin taking your taxable withdrawals no later than April 1 the year after you turn 72*.

    Subsequent annual withdrawals are then due by December 31 each year thereafter. If you postpone your initial distribution to the first quarter of the year after you turn 72*, you will have two distributions in that second year.

    Failure to comply with this requirement carries a full 50% penalty of the requirement amount not withdrawn.

    * For those born after June 30, 1949.

Download Our Free Guide

This free guide is designed to teach you the most important tax and financial planning milestones to be aware of as you age.

Among other things, you will learn…
• How to take advantage of catch-up contributions at age 50
• The basics of required minimum distributions (RMDs)
• When a Roth conversion might be advantageous

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