As a rather eventful 2020 ends, we wanted to outline several age milestones and contribution limits which will present potential planning opportunities for 2021:
Age 50 – You can increase your annual contribution to your 401k by $6,500, while those contributing to a Roth or Traditional IRA can add an additional $1,000. With retirement rapidly approaching, this offers a great opportunity to supercharge your savings. If you participate in a SIMPLE IRA, you can increase your contributions by $3,000.
Age 55 – If you have a 401k that is still with a past employer, you may be able to access it without the 10% early withdrawal penalty. Keep in mind you will still pay ordinary income tax on the withdrawals, but this could help you bridge the gap until you are eligible to draw from IRA’s or Social Security. If this is something you are interested in, check with your plan sponsor to see if it’s an option in your plan.
Age 59 ½ – At this point, you are able to withdraw money from your IRA’s without paying the 10% penalty for being under age 59 ½. While there is no penalty, the withdrawals will still be taxed as ordinary income unless they are an eligible distribution from a Roth 401(k) / Roth IRA or the basis from a non-deductible IRA.
Age 60 – You may be eligible for Social Security Survivorship Benefits if you are a widow or widower. If you are eligible, be aware that taking SS at the soonest eligible date will reduce your benefit by as much as 28.5%.
Age 62 – You are eligible for reduced Social Security, however, similar to survivorship benefits mentioned above, the amount will be permanently reduced by up to 25%. You will likely want assistance analyzing whether taking Social Security early at a reduced benefit makes sense within the context of your overall financial plan, health, etc.
Age 65 – Medicare is now part of your overall health care decision. You are given a 7-month window to enroll (3 months prior to your 65th birthday, the month of your birthday, and 3 months following that month). If you happen to be contributing to a Health Savings Account, you are no longer able to do so. The upside is that you can take money from the Health Savings Account for any reason without penalty. Taxes on withdrawals will apply, but if they are used for eligible medical expenses they will be tax-free. It is also important to consider the numerous Medicare Supplements that are available. While choice is generally a good thing, there can be a lot of confusion as to the type of coverage you need, and the costs involved. If you do not feel you have the expertise to make an informed decision, we can put you in contact with a trusted expert and/or resource who can assist you.
Aside from Medicare being an important milestone, any Disability Income policies should be reviewed if you are still working (or if you are collecting benefits). Many benefits will stop paying at age 65 and coverage generally ends at that time.
Age 66 – This is considered full retirement age (exact age varies by birth date – 66 years and eight months for persons born in 1958) and you are entitled to your full Social Security Benefit at this point. If you are still working, or do not need the income, it’s worth analyzing whether or not you should begin taking benefits since taxation and increased benefits for waiting could be a factor in your decision.
For those who have not done so, we recommend reviewing your Social Security statement on an annual basis. You can now create an online login at https://www.ssa.gov . Statements are now only mailed every 5yrs if you do not have an online login.
Age 70 – Even if you are still working, this is the age that will give you the maximum Social Security payout. Benefits no longer accumulate after this point.
Age 72 – While age 59 ½ allows you to access your IRA penalty free, age 72 means you must start taking Required Minimum Distributions from your retirement accounts such as IRA’s and 401K’s (no need to take from your Roth IRA). There is some flexibility with regards to your first distribution, but we recommend you talk with us and your tax advisor to make an informed decision. If you are charitably inclined, there are some planning techniques that can be incorporated with this distribution as well.
Note on Beneficiary / Inherited IRA’s: Passed in late 2019, The Secure Act altered both the RMD age requirements (mentioned above) as well as newly inherited Beneficiary IRA’s. This new law does not impact the ability of spouses to inherit an IRA and “stretch” that IRA over their lifetime. However, other than a spousal IRA, an IRA inherited from a grandparent, parent, etc. will now have different rules. Rather than allowing the individual to stretch that IRA over their lifetime, the government mandates it be taken in full within 10yrs. This can have multiple implications for planning, tax management, etc. We recommend discussing this with your financial advisor and/or CPA if you have questions.
Common Contribution Limits
- Traditional & Roth IRA’s – staying at $6,000/yr; catch up contribution of $1,000/yr for those age 50 and older
- For the Roth IRA, you can make a full contribution if your adjusted gross income (AGI) is under $125,000 for a single tax filer and less than $198,000 for married filers.
- Conversely, if you are a single filer and make more than $140,000 AGI, or married making more than $208,000, you cannot make any contributions to a Roth IRA.
- If you fall between those income limits, you may be able to make a partial contribution to your Roth IRA.
- For Traditional IRA’s, the amount you can deduct from your taxes is a bit complicated depending on whether you or your spouse are covered under an employer-sponsored plan, as well as your income level. Consult your CPA for specifics.
- 401(k) Plans – stays the same at $19,500/yr; catch up contributions also remain unchanged at $6,500/yr for those age 50 and older (also for Solo 401k, 403b, and most 457 plans).
- SEP IRA’s & Solo 401k’s – for the self-employed and small business owners, the amount you can save in a SEP IRA or a Solo 401(k) is $58,000 for 2021 (up from $57,000 for 2020). That is based on the amount you can contribute as an employer, as a percentage of salary.
- SIMPLE IRA’s – The contribution limit on SIMPLE retirement accounts is increasing to $13,500. The SIMPLE catch-up limit is $3,000 for those reaching the age of 50 in 2021.
- HSA’s – For 2021, the annual limit on deductible contributions is $3,600 for individuals with self-only coverage under a High Deductible Health Plan (HDHP) (a $50 increase from 2020) and $7,200 for family coverage (a $100 increase from 2020).
As always, should you or your loved ones have any question regarding the above, please do not hesitate to contact LJI. Best wishes for a Happy Holiday Season and a safe & prosperous New Year.