The Chestnut Blog

As each new calendar month approaches our office administrator hands me a list of client names whose birthday will be coming up over the following 30 or so days. As I write something in the card I find myself reflecting on such things as how long we have had our client/advisor relationship and what changes have taken place over the years in addressing the clients changing needs. As I worked on this months birthday list the thought came to mind that for various clients their birthday might have even more financial implications for them than for others. Working with that thought it seemed to make sense, beginning with age 50, to look at some of the choices and opportunities that come with attaining certain milestones. Consequently, key ages to note are as follows:

• Age 50 You will become eligible to make catch-up, or extra contributions to your IRA and 401(k), or a similar retirement plan. For 2010, the catch-up amount in a 401(k) is $5,500 over the basic limit of $16,500. For an IRA, the catch-up amount is $1,000 over the basic $5,000

• Age 55 If you separate service with your employer in or after the year that you reached age 55, distributions from a qualified retirement plan other than an IRA will not be subject to the early withdrawal 10% penalty. However, you will need to pay income tax unless you roll the money into an IRA or another 401(k).

• Age 59 ½ You can withdraw money from your 401(k) plan without paying the 10% penalty, regardless of whether or not you leave your job or retire. You will have to pay income tax, unless you roll the money into an IRA or another 401(k) plan. For traditional IRA accounts there is also no longer any 10% penalty on withdrawals made, but income tax needs to be paid at the same rate as if it were ordinary income.

• Age 62 You are eligible to start receiving Social Security. However, you may want to consider waiting. The longer you wait (up until age 70) the higher your benefit will be. Yet another reason to delay could be due to the earnings test. If you receive Social Security while you’re earning money from a job, your benefit will be reduced if your earnings exceed the annual minimum allowed.

• Age 65 You are now entitled to Medicare coverage. You need to take this even if you don’t plan on taking your Social Security benefit yet. If you want to retire before you turn 65, be sure to check out all your other options for health care insurance since this expense can consume a significant amount of your retirement income.

• Age 62-70 As mentioned above, you are eligible at age 62 to start receiving Social Security benefits, but at a reduced amount. Your full benefit will depend upon the year that you were born and how old you will need to be to attain your full retirement age. For example someone born in 1947 (a baby boomer!) will need to be 66 years and six months old to reach a full retirement benefit.

• Age 70 ½ Tax law requires you to start withdrawing money from your IRA’s in what is referred to as a required minimum distribution. It does not pertain to Roth IRA’s. For the first withdrawal, however, you are allowed if you so choose, to defer that until no later than April 1st following the year that you turn 70 ½. However, if you do so, you will need to make two withdrawals during that year. The second by December 31st of that year. The withdrawal calculation takes into consideration life expectancy. It is important to have a full understanding of the tax requirements as the failure to take a required minimum distribution, or not withdraw the proper amount, will result in a 50% penalty on the amount determined to have not been properly withdrawn.

So whether or not you choose to throw that big party for this years birthday, keep in mind where you are on your financial age timeline and be aware of what is available to you. By the way, you’re only as old as you feel, so think young anyway!

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