Did you know that there are rules and regulations that can help you avoid higher taxes and penalty fees and help you structure your income to minimize taxes? Getting the most out of your retirement savings takes more than adjusting your portfolios. Know these 3 ages that can help you get the most out of your retirement accounts.
Celebrate Catch-Up Contributions at Age 50!
You can make catch up contributions in addition to your usual contributions once you turn 50 with certain qualified retirement plans. With the additional catch-up contributions, you can contribute $17,000 to a Simple IRA an up to $27,000 to most other workplace retirement plans in 2022 (401(k)s, 403(b)s, 457 plans, and TSP for example).
Individuals with certain qualified retirement plans can make catch-up contributions in addition to their usual contributions once they turn 50. An IRA contribution of up to $6,000 may be made in 2022 if you are under 50, and an additional $1,000 may be made if you are 50 or older. Those 50 and older who participate in a Simple IRA or Simple 401(k) may contribute up to $17,000 in 2022. A 401(k), 403(b), most 457 plans, and a government Thrift Savings Plan may contribute up to $27,000 in 2022 if they are 50 or older.[i]
Reaching 59.5 Qualifies You for Penalty-Free Retirement Account Withdrawals!
There are several advantages to aging. Once you reach age 59½, you can take money out of your IRA or old 401(k)s without paying an early distribution penalty! This holds true regardless of whether you rolled money from a workplace plan to an IRA or vice versa – it’s still age 59.5 for penalty free withdrawals.
But there are a few important details to know. Your workplace plan may not allow you to withdraw your funds if you are still employed at age 59.5. The plan needs to have a clause to allow what’s known as an ‘in-service distribution’ before you can do this. Without it your money will stay locked up in the plan until you stop working for that employer.
Additionally, you may be able to pull funds out of your workplace plan penalty free if you are at least 55 years old and fully retired. But this exception only applies to your most recent employer’s plan and only to certain types of plans. It won’t cover distributions from your IRA, for example, or another older employer’s plan. You may also be able to access funds before age 59.5 if the distributions are part of a series of Substantially Equal Periodic Payments (SEPP) under rule 72(t).
Take a Birthday Check with Required Minimum Distributions at age 72
Beginning in 2020, the SECURE Act altered the age at which Required Minimum Distributions (RMD) begin from 70½ to 72. RMDs are exactly like they sound and require you to pull a certain amount of money out of your tax-advantaged retirement accounts. Qualified retirement plans, such as 401(k)s, 403(b)s, Profit Sharing plans, Money Purchase Pensions, IRAs, Simple IRAs, and SEP IRAs, are subject to RMDs.[ii] This includes Roth money inside of any of these plans even though Roth IRAs do not have RMDs! This is an important detail and something worth considering when deciding whether to rollover funds, or at least partially rollover funds, to a different account.
RMDs are not optional. Failure to take a withdrawal, or to withdraw too little, results in a penalty equal to 50% of the amount that should have distributed. Ouch! With such a steep penalty its critical to ensure you take this distribution even if you don’t strictly need the money.
If you’re concerned about getting hit with a big tax bill in your seventies, then consider Roth conversions prior to your required beginning date. These move money from your pre-tax ledge to your after-tax ledger and reduce the size of your RMDs. You can also look at using Qualified Charitable Distributions (QCDs) to reduce the tax hit if you’re charitably inclined.
If you have questions about how to optimize your retirement accounts to minimize taxes and maximize your retirement savings, you can sign up for a complimentary review with us of your financial plan.
[ii] https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions#:~:text=What%20types%20of%20retirement%20plans%20require%20minimum%20distributions%3F,-The%20RMD%20rules&text=profit%2Dsharing%20plans%2C%20401(,Roth%20401(k)%20accounts.
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