Important Dates

Warning! Laws concerning Social Security, retirement accounts, and income tax law are so convoluted and abstruse, I consult my CPA anytime I am in doubt as to the consequences of my actions. I strongly encourage you to do likewise. A second set of eyes on your plans is a good idea even if your name is Warren Buffet and believe me, mine isn’t.

55 Years Old: Earliest age at which there is the possibility of a penalty free withdraw from a 401K

Your tax deferred retirement account is your last line of defense. Tapping it early is almost always a bad idea. However, if you leave your job or loose your job after the age of 55, you can withdraw funds without penalty under certain circumstances. The big catch here is you must continue taking these payments for five years or until you are 59 ½ whichever comes later. You will, of course, be required to pay income taxes on these funds, but you will not be hit with the dreaded 10% penalty. An example of how to use this exemption is described in an article found in Forbes. A very rich man who has many assets, chooses to make withdrawals from a 401K to buy a vacation cottage at the beach for his family. Given current low real estate prices and low mortgage interest rates, withdrawals that match his mortgage payments make sense given his entire financial situation. Beware! Even allowed exemptions can contain traps. An example given in another article found in Forbes notes, while there is a penalty free exception for higher-education expenses paid for from an IRA, this does not work for a 401K unless you roll the money from a 401K into an IRA before using the funds. I can’t over emphasize this enough! Please, check out any such move with an accountant before doing anything that might be irrevocable.

59 ½ Years Old: Penalty free withdrawals can be made from any retirement account

This is true of convention IRAs, 401K accounts, 403B accounts, SEP (Simplified Employee Pension Individual Retirement Arrangement) or SIMPLE (Savings Incentive Match PLan for Employees). Note: earnings from Roth IRAs are tax free and penalty free if you have held it for five years. I got to take a tax deduction on a loss suffered with a Roth IRA (lucky me) after I turned 59 ½ and after holding it for five years. Lesson learned, anyone who sells you a financial product containing a 12-B-1 fee is not your friend.

62 Years Old: Early Social Security

This is the earliest age at which you can collect Social Security benefits unless you are disabled. If you elect this option your benefits will be permanently reduced by approximately 25%. There are three reasons I can think of to take early Social Security.

1) Making the numbers work for freedom. If you are really close to early retirement and you really want your freedom, the reduced benefit might be just enough to kick you over the fence when added to your pension, 401K, and savings.
2) You lost your job and you can’t find another. More and more older Americans are being forced into early Social Security by economic circumstance. They want to work, but they can’t find a job. Early Social Security is their life line.
3) You think you are going to die sooner rather than later. This is a simple actuarial calculation. If you think you are going to die before 78-79 years old you are better off taking Social Security at 62. If you think you are going to live longer than that, wait and take full Social Security at 66-67 (depending on your birth date).

In any event, taking early Social Security can come back to bite you. If you write the great American novel after 62 or find the job of your dreams, there will be a hit to your Social Security check by the tax man. From Taxes on Social Security Benefits by Dan Anspach, “The key thing to know is that up to 85% your Social Security benefits received can be taxed, but never 100%. Why is this so important? It means that after taxes, $1 of Social Security income is worth more than $1 of IRA withdrawals because 100% of the IRA withdrawal is likely subject to taxation, whereas at most only 85% of Social Security benefits received will be subject to taxation. It is also important to note that ROTH IRA withdrawals do not count in the formula referenced above, but municipal bond income does.”

65 Years Old: You are eligible for Medicare.

If you are already receiving Social Security benefits, enrollment in Medicare Part A and Part B is automatic. If not, you need to apply at with Social Security. If you choose to decline Part B, you may be penalized for late enrollment if you change your mind at some future date. For those of us fortunate enough to carry private health insurance into retirement, the addition of Medicare complicates the coverage and payment process, but as in the case of my mother-in-law, her dead husband’s insurance saved the family untold thousands in medical expenses.

66-67 Years Old: Social Security Full Retirement Benefits

Depending on your birth date you can begin to collect Social Security without any reduction to your benefits. At your Full Retirement Age (FRA) you can draw full benefits even if you continue to work. For each year you delay beyond your FRA, your benefit will continue to increase by 8% a year until you turn 70. Note: there are games you can play with Social Security to maximize your benefits. Right now, I expect that my wife will take Social Security at 62. I plan to wait until my FRA before tapping my Social Security account. At that time my wife will switch from taking her benefit to taking a larger spousal benefit off my Social Security. This will increase the total amount we can draw from Social Security. Talk to someone who knows about these things, explore the Social Security calculators found on the web, run “what if” calculations that examine all options (your broker has tools for this sort of thing); start with a visit to the Social Security Administration web site, but don’t end your research with what is found at any one source.

70 Years Old: Maximum Social Security Benefit

Once you turn 70 that is it. You can’t increase your Social Security Benefit, so you might as well take it, even if your name is Warren Buffet.

70 ½ Required Minimum Distribution (RMD)

At this age you are required to take money from any of your tax-advantaged retirement accounts except for a Roth IRA or your 401K if you are still working. How much is determined by a complex formula based on your life expectancy and the amount of money you hold in these accounts. This calculation should be made by your CPA. If you have lived this long, worked for so many years, and accumulated some wealth, this is one you don’t want to screw up. From Social Security, Medicare, and More: What Are the Dates to Remember? By Carrie Schwab Pomerantz, “IMPORTANT NOTE: You absolutely must take your first RMD by April 1st of the year after you turn 70½ or face a hefty 50% PENALTY! And if you wait until that date, you must take your second RMD by December 31st of that same year. You don't want to miss these deadlines.” EEK!

And Please, Let’s be extra careful out there today.