Whether retirement is right around the corner or still years away, there are important milestones and decision points that we plan for on your journey. Tax breaks, Social Security, Medicare, and when you must take money from certain accounts are all factors in the customized strategies we develop for your unique situation. And while mostly beneficial, a couple of these points also come with penalties that you likely will want to avoid.
Age 59 years, 6 months: You can take money out of retirement accounts without a penalty
IRAs, 401(k)s, 403(b)s, and other accounts can provide generous tax benefits while you’re working, but money in those accounts can be subject to a 10% early distribution penalty from the IRS, plus income taxes. Fortunately, that penalty goes away after you reach age 59½. Depending on the type of retirement account you have, other opportunities to avoid early withdrawal penalties may be available to you. Talk to your financial advisor or tax professional to understand your options.
Money you take from these types of accounts may still add to your household ordinary income and be taxed as such. The exception would be when drawing from post-tax funds such as those found in Roth accounts, which are funded with after-tax contributions. The money you contributed (your “basis”), can be removed from a Roth account and used at any time without penalty or tax. Earnings can be removed without penalty or tax once you reach age 59 ½ and it has been five years since January 1 of the year you opened, funded, and continuously held the account.
Age 62: You can begin receiving Social Security with significantly reduced benefits
62 is the youngest age you can claim regular Social Security retirement benefits. However, there can be a substantial cost to taking this option. Your monthly benefits can be reduced significantly for the rest of your life if you take them before your full retirement age.
Nevertheless, it is not always prudent to delay your Social Security claim until the very last moment. Determining when to begin taking Social Security benefits depends on several important considerations like your financial needs, health condition, tax situation, marital status, and earnings history. Consult your financial professional about what options and strategies make the most sense for you based on your broader financial plan.
Age 64 years, 9 months: Be sure to enroll in Medicare
The Medicare health insurance system provides coverage in three main parts: hospital care, doctor visits and outpatient care, and prescription drugs. Long-term custodial care or home health care is not included in Medicare, but additional coverage can be purchased from some private insurance companies.
Medicare is not free. You must pay for coverage depending on your annual income, and you’re still responsible for copays and meeting deductibles. It’s also important to know that Original Medicare alone does not put a cap on what you may need to pay out of pocket. Private insurance usually provides out-of-pocket maximums, but this may cost extra.
You can postpone the start of Medicare Part B (physician and outpatient service) benefits without having to pay higher premiums if you still have medical insurance though your employer or your spouse's employer. Either way, you should still enroll in the Medicare system around the time you turn 65. If you have paid long enough into the Medicare system, regardless of whether you should enroll in Medicare Part B (and pay the additional monthly premium), you are entitled to Part A benefits (hospital room and board).
Healthcare can be among the largest expenses you will face in retirement. Consult the Medicare website and talk to your financial professional about what health insurance options and strategies make the most sense for you based on your broader financial plan.
Age 65: Medicare coverage typically begins
Medicare coverage starts on the first day of the month in which you turn 65, regardless of whether you have retired. That day also opens a six-month enrollment window for guaranteed issue Medicare Supplement insurance. Commonly known as Medigap, this is private insurance which works alongside your Original Medicare to cover some of the out-of-pocket copays and deductibles of traditional Medicare.
Guaranteed issue means that you cannot be denied a Medigap policy or charged extra for your premium because of poor health if you enroll during this six-month window. If you miss this window, however, you may no longer be able to purchase a Medicare Supplement plan if your health is poor.
Age 66-67: You reach full Social Security retirement age but may decide to wait
Depending on when you were born and your work history, you typically will qualify for your full Social Security retirement benefit sometime between the ages of 66 and 67:
Year of birth
Full retirement age
66 and 2 months
66 and 4 months
66 and 6 months
66 and 8 months
66 and 10 months
1960 or later
Source: Social Security Administration.
However, you do not have to begin taking Social Security at full retirement age. Your benefits will continue to increase each month you delay until you reach age 70. This may be a wise financial move if you are looking forward to many years of retirement and do not immediately need the monthly income. In fact, your monthly check at age 70 can be up to 32% larger for the rest of your life compared to starting Social Security benefits at your full retirement age (Source: Social Security Administration).
Age 70: File for Social Security if you haven't already
Begin taking Social Security retirement benefits at age 70 if you haven’t started yet, although there is no penalty for missing this date. Your benefits will not increase any more by postponing them past age 70.
Age 72: Begin required minimum distributions (RMDs)
Tax laws for retirement accounts discourage you from taking money out early. Most qualified retirement accounts also will force you to start taking money out at some point. These forced withdrawals are called required minimum distributions, or RMDs.
RMDs are calculated based on your life expectancy and determine a specific, ever-increasing percentage of your retirement accounts that you must take out each year. Failing to meet RMD guidelines could subject your required minimum distribution to an additional excise penalty of 50%. That is in addition to any ordinary income tax which might also be due on the withdrawal.
Exceptions to these rules are available with Roth accounts, which not only feature tax-free withdrawals but typically are exempt from RMDs (inherited Roth accounts have different distribution rules). These features make Roth accounts, and conversions of traditional accounts into Roth accounts, a useful tool to help manage retirement income and estate taxes. Talk to your financial professional about how Roth accounts may help support your specific financial planning needs.
Understanding deadlines and requirements for Medicare, Social Security, and tax considerations can help us maximize your resources both before and during retirement. Regardless of your current age, these milestones represent important benefits and opportunities that should be integrated into a well-designed, comprehensive financial plan.
Tim Drake helps individuals and families build and align their finances for living a fulfilled life. Working with integrity and mutual respect, his comprehensive process includes investments, debt and cash flow management, insurance, and tax, retirement, and estate strategies. He is a Senior Financial Advisor at Pegasus Financial Planning, a fiduciary, fee-based Registered Investment Advisor (RIA).