Financial Milestones by Age

Financial Milestones

Many are familiar with medical age milestones. For example, cholesterol screening should begin at 35, mammogram at age 40, and colonoscopy starting at age 50. Similar to these medical milestones, you will want to be aware of key financial ages, especially as you plan for retirement. 

Before we jump into the details, we asked our team of advisors and our investment manager for the best financial advice they wish they would have received at different times in their lives:

Financial Advice I Wish I Would Have Had When
I Was In My 20s, 30s, 40s, 50s, and 60s:

Advice for your 20s and 30s

  • Earning power is likely your biggest asset.

  • Prioritize your goals and spread them out.

  • Save—even if it’s a small amount.

  • Have someone review your employer benefits.

  • Is it time to invest in your forever home?
  • Consider how having children will impact your career.

Advice For Your 40s and 50s

  • Spend time to get your financial house in order and revisit yearly.
  • You are in or are approaching your peak earning years, so be sure to save in and outside of your retirement account.
  • Take time to enjoy your life.
  • If you're fortunate to have living parents, spend time with them and remain close.
  • Reevaluate your insurance needs.
  • Update your estate plans.

Advice For Your 60s+

  • Consider when you should start Medicare and Social Security.
Read the full article here>>

 

From our experience turning 50, 55, and 59½ are important milestone ages for many investors and savers. We've compiled a list of key financial variables to consider at each age.

Catch-Up Contributions

Starting the year you turn 50; you can make catch-up contributions to several different retirement plans. Contributions can be made anytime throughout the year, as long as you turn 50 by year-end.

Taking advantage of catch-up contributions is a great way to set aside additional dollars for retirement (both pre-and post-tax) and may also help individuals who potentially didn’t save early enough in their careers.

The catch-up contribution amounts shown below are based on applicable dollar amounts associated with the 2021 tax year. Furthermore, if you are married, these limits also apply to your spouse.

IRAs and Roth IRAs

The annual contribution limit between these two accounts (aggregated) is currently $6,000 per individual. For those over age 50, an additional $1,000 catch-up contribution is allowed.

401k, 403b & 457b Plans

The annual contribution limit is currently $19,500. For those over age 50, an additional $6,500 catch-up contribution is allowed. Special catch-up rules may apply to certain 403b plan contributors who have 15 or more years of service and government employees during the final three years before retirement (generally defined as age 65).

Simple IRAs

For participants in these small employer plans, the annual contribution limit is currently $13,500. For those over age 50, an additional $3,000 catch-up contribution is allowed.

Read More: 5 Retirement Planning Questions with Retirement Coach Ruth Tongen>>

Health Savings Plans

If you are covered by a high deductible health insurance plan and contributing to a Health Savings Account (HSA), at age 55, you can make catch-up contributions. 

In the calendar year 2021, the annual catch-up contribution is $1,000. If you and your spouse each have an HSA, you are both eligible to make this catch-up contribution, essentially doubling present and future tax benefits.

The Health Savings Account is a great savings mechanism since it offers what we refer to as “Triple Tax-Free Benefits," which can consist of the following:

Pre-Tax Contributions

Your contributions to an HSA are made on a pre-tax basis. That means you avoid paying ordinary income tax on whatever amount you contribute to the HSA during the applicable tax year.

Tax-Free Growth

You can invest the balance in your HSA, much like you would with your 401k, IRA, Roth IRA, and taxable accounts. The benefit of investing money in your HSA is that the growth is tax-free. Considering the projected future costs associated with health care, this is a great way to build your portfolio to cover medical expenses during your retirement years.

Tax-Free Withdrawals

As long as your distributions are used for qualified medical expenses, they can come out of your HSA on a tax-free basis—both now and in the future.

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Exceptions to Early Withdrawal Penalties

As a general rule, distributions from a retirement plan before the age of 59½ are subject to ordinary income tax and a 10% early withdrawal penalty.

Now that you are 55 years old, you may be able to avoid the early withdrawal penalty on distributions from specific retirement plans. However, before initiating a withdrawal, we highly recommend you connect with your Financial Advisor and Tax Professional to ensure that the distribution qualifies for an exception.

Some of the more common early withdrawal exceptions include:

401k/403b Plan (Age 55 and Separation from Service)

The keyword here is “AND.” To be eligible for this unique exception, you must separate from service (i.e., retire, quit, termination, layoff) after age 55. Assuming separation from service happens after age 55 (and before age 59½), you will likely find that you are eligible to take penalty-free withdrawals from your former workplace retirement plan. The distributions would still be subject to ordinary income tax, however. Another key variable in this situation is that the assets need to be retained inside your former workplace retirement plan (i.e., they cannot be rolled over to an IRA).

72(t) IRA Distributions

If you aren’t yet age 59½, but you have already rolled your workplace retirement plan into an Individual Retirement Account (IRA), you may still be eligible to avoid the 10% early withdrawal penalty. One way to avoid the fee can be by setting up a 72(t) IRA. This strategy allows IRA holders to access funds in their account without incurring the 10% early withdrawal penalty, assuming the following conditions are met:

  • Substantially Equal Periodic Payments – as long as distributions are set up as part of a series of substantially equal periodic payments, which need to last until age 59½ or 5-years (whichever is longer), you may be able to avoid the 10% early withdrawal penalty.
  • Any changes in the substantially equal periodic payments that are made within 5-years of the date of the first payment (or age 59½ if longer than 5-years) will negate the benefit of avoiding the 10% early withdrawal penalty.

Workplace Retirement Plan Rollovers (In-Service)

Once you reach age 55 (while still actively employed), your employer-sponsored retirement plan may give you the option of doing an in-service rollover of your workplace retirement plan into a separately managed IRA. If you prefer the customization, consolidation, and professional advice available through your Investment Advisory Firm, this may be a consideration.

Read More: 7 Considerations When Consolidating Multiple Retirement Plans>>

Turning age 59½ is an important milestone for many as it is the magic age associated with accessing funds in your retirement plan without being subject to the 10% early withdrawal penalty. However, there are some instances where investors still need to pay attention to applicable rules and regulations to make sure Uncle Sam doesn’t show up with a surprise tax bill!

Retirement Plan distrubutions

You’ve spent the better part of your career setting aside money into pre-and post-tax investment accounts to help fund your various retirement goals. Now that you’ve turned 59½ years old, you’ll need to determine the most tax-efficient way of tapping into your investment portfolio to reduce the impact of taxes and, more importantly, penalties!

The following accounts are common amongst retirement investors, but some of these carry a few distinct rules associated with taking penalty-free distributions:

401k, 403b and 457b plans

Generally speaking, once you turn 59½ years old, you are eligible to take penalty-free distributions from these employer-sponsored retirement plans.

Workplace Retirement Plan Rollovers (In-Service)

Once you reach age 59½ (while still actively employed), your employer-sponsored retirement plan may give you the option of doing an in-service rollover of your workplace retirement plan into a separately managed IRA. If you prefer the customization, consolidation, and professional advice available through your Investment Advisory Firm, this may be a consideration.

IRAs

Generally speaking, once you turn 59½ years old, you are eligible to take penalty-free distributions from your IRA. If your IRA consists of 100% pre-tax money, you can expect 100% of your distributions to be as fully taxable as ordinary income. However, to the extent you’ve made nondeductible contributions into your IRA, you should have IRS Form 8606 that indicates your basis in the IRA. In this instance, distributions will be pro-rated between the taxable and tax-free (return of basis) portions during your retirement years.

Roth IRAs

You can always take out whatever you’ve contributed to a Roth IRA
(both tax and penalty-free), regardless of your age. With that said, if you’ve done a good job of saving for retirement, hopefully, you’ve retained the assets inside your Roth IRA so they’ve enjoyed the benefits of compound growth over several decades.

At retirement, you may now find yourself in the position of wanting to tap into your Roth IRA to cover ongoing expenses. Before doing this, take into account the two major components of proper Roth IRA distribution planning (to tap into the growth component tax and penalty-free):

  1. The Roth IRA must have been established for at least 5-years AND…

  2. The Roth IRA owner must be age 59½.

As long as these two critical components have been met, tax and penalty-free distributions (including those tied to the growth portion of the Roth IRA) can be taken.

Health Savings Accounts

Unfortunately, age 59½ has no bearing on distributions from an HSA. Instead, tax-free distributions can be taken anytime during the account owner’s lifetime, as long as the funds are used to pay for qualified medical expenses. If distributions are taken for non-qualified expenses, they are subject to ordinary income tax and a 10% penalty. One important exception to the 10% penalty, would be distributions that are taken post-age 65 for non-qualified expenses. In these instances, ordinary income tax is due, but there is no 10% early withdrawal penalty, essentially making the distribution equivalent to that of a 401k, 403b or 457b plan withdrawal.

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