Milestone Ages

When you’re a kid, there are certain birthdays you can’t help but look forward to. When you’re sixteen and can drive, for example. When you turn eighteen and can vote. When you turn twenty-one and can…well, you know.

As adults, we typically don’t see ages the same way that kids do. But some ages are particularly important. Why? Because they have significant implications for your finances. Here are four of those milestones:

Age 59.5

When you turn 59.5, the early withdrawal penalty on your IRA and 401(k) will end. It is also the age at which many plans allow you to roll your balance into an IRA.

Having the penalty removed means you can withdraw money from your retirement accounts without facing a 10% penalty. That's good news if you ever need a quick infusion of cash!

However, there are a few things to keep in mind before deciding whether to take advantage of this. First, it's important to understand that, while the 10% early withdrawal penalty will no longer apply, any withdrawals you make from your retirement accounts will still be taxed as regular income. So, it's hardly free money. Second, you should know that it's often a good idea to leave that money in a retirement account. That’s because the money inside these accounts should ideally go to one thing: your retirement! That way you’ll have the means to do what you want to do, go where you want to go, and live the life you want to live.

Many pre-retirees roll their 401(k) balance into an IRA to get access to professional management and often more investment choices. There are many things to consider when looking at this option, cost being one of the biggest. While you do pay fees within a 401(k), costs can rise if using professional management. It’s important to consult with a professional to determine whether this option makes sense for you.

Age 65

Turning 65 is a significant milestone, especially when it comes to healthcare. At this age, you become eligible for Medicare, the federal health insurance program for people aged 65 and older. To be eligible, you must be a U.S. citizen or a legal permanent resident who has lived in the U.S. for at least five continuous years, and you or your spouse must have worked and paid Medicare taxes for at least 10 years.

Medicare is divided into different parts:

• Part A covers hospital stays, skilled nursing facility care, hospice care, and some home health care. Most people don't pay a premium for Part A if they or their spouse paid Medicare taxes while working.
• Part B covers certain doctors' services, outpatient care, medical supplies, and preventive services. Part B requires a monthly premium.
• Part C (Medicare Advantage) is an alternative to Original Medicare (Parts A and B) and is offered by private insurance companies. These plans often include additional benefits like vision, dental, and hearing coverage.
• Part D covers prescription drugs and also requires a monthly premium.

If you are covered under a group health insurance plan through your or your spouse's employer, you may be able to delay enrolling in Part B without penalty. This is because the group health plan will be your primary insurance, and Medicare will be secondary. However, once the employment or coverage ends, you have a special enrollment period to sign up for Part B without facing late enrollment penalties.

It's important to sign up for Medicare during your Initial Enrollment Period, which starts three months before you turn 65 and ends three months after your 65th birthday. Missing this window can result in late enrollment penalties and delayed coverage.

Age 66-67

Depending on when you were born, this is when you reach your Full Retirement Age – the age at which you can begin taking Social Security benefits without any reduction. Below is a handy table that shows the Full Retirement Age for every birth year, starting with 1955.

While waiting until your Full Retirement Age means you can take Social Security without any reductions, you can potentially increase your payments if you wait even beyond your Full Retirement Age! In fact, your Social Security benefits increase by 8% for each year you wait to start your payments up to age 70. After you turn 70, there's no additional benefit to waiting.

Age 73

From a financial standpoint, turning 73 is one of the most important birthdays you can have. That’s because it’s now time to start rewarding yourself every year with a special kind of present called Required Minimum Distributions.

You see, once you reach age 73, you must begin taking annual withdrawals from any 401(k)s, 403(b)s, or traditional IRAs you have. (Roth IRAs don’t require withdrawals until after the death of the owner.) These withdrawals are called required minimum distributions, or RMDs. RMDs are essentially the government’s way of ensuring people use tax advantaged accounts for what they were designed – to fund retirement. And yes, RMDs are usually taxed as ordinary income.

What happens if you don’t take distributions? Simple: The IRS will hit you with a 25% penalty based on the amount you should have withdrawn. The penalty also applies if you don’t take out at least the minimum amount required.

How RMDs are calculated

So, how much will you have to withdraw when you take out your annual distributions?

Here’s the formula in a nutshell. To calculate your RMD, first take the balance of your IRA (or other retirement plan) as it stood on December 31 of the previous year. Then, divide that balance by your life expectancy factor, which is determined by the IRS every year. You can find the factor that’s specific to you by consulting with the proper calculation tables on the IRS website², which can be found at https://www.irs.gov/retirement-plans/plan-participant-employee/required-minimum-distribution-worksheets.

RMDs are a particularly important part of retirement planning, so you should definitely factor them into your thinking as early as possible.

Understanding and planning for these key retirement dates is crucial for ensuring a secure and comfortable retirement. Each milestone, from age 59.5 when early withdrawal penalties end, to age 65 when you become eligible for Medicare, and finally to age 73 when Required Minimum Distributions begin, plays a significant role in your financial and healthcare planning. By being aware of these dates and the associated rules, you can make informed decisions that maximize your benefits and minimize potential penalties, ultimately helping you achieve your retirement goals and enjoy the lifestyle you envision.