Key retirement income-related dates for baby boomers

“Baby boomers,” those born between 1946 and 1964, comprise the largest population boost in American history — roughly 75.8 million people, or one-third of the U.S. population. Approximately 10,000 of them will turn 65 every day for the next 15 years or so. While baby boomers may have many important dates that stick out in their minds — the JFK and MLK assassinations, the Apollo 11 moon landing, the Cuban Missile Crisis, and the Watergate scandal, just to name a few  — there are other dates associated with their retirement that are also important for them to remember.

These dates have financial significance not only for baby boomers, but also for the generations that follow as they plan for and live in retirement. Missing these dates may have a detrimental impact on the individual’s financial well-being in retirement. However, understanding the relevance of these dates and the savings options associated with them may help to increase baby boomers’ after-tax income and financial security in retirement.

In order as the dates occur:

Age 50 — Catch-up contributions

Many retirement plans — i.e. 401(k), 403(b), and 457(b) — allow participants who are age 50 or older to make additional salary deferral contributions to the retirement plan known as a “catch-up contribution.” For 2016, the catch-up contribution limit is $6,000. Traditional and Roth IRAs may also permit a catch- up contribution of $1,000 for 2016.

Age 55 — Possible withdrawals from a participant’s retirement plan without additional tax for early distributions

Retirement plan participants who are age 55 or older and separate from service may be able to take a distribution from their 401(k) or 403(b) plan without paying the 10 percent additional tax for early withdrawal that would normally apply. Generally, any distribution prior to age 59½ would result in the 10 percent additional tax for early withdrawal unless an exception applies. Separation from service at age 55 or older is one of the circumstances for which there is an exception. The distribution will be taxable to the participant, but no additional tax will apply. It is important to note that this exception to the early withdrawal additional tax only applies to 401(k) or 403(b) plans, not to an IRA account. So remember, if a participant elects to roll over his or her retirement plan account into an IRA, this benefit will be lost and the participant must wait until age 59½ to take a distribution without the additional tax applying.

Age 59 ½ — Withdrawals from all retirement accounts without additional tax for early distributions

Once the individual reaches age 59½, he or she may take withdrawals from any retirement account (i.e. IRA, 401(k), 403(b), SEP IRA, or SIMPLE IRA) without the additional tax for early distributions applying. Again, the withdrawals will generally be subject to ordinary income tax. In addition, withdrawals from a Roth account after age 59½ will also not be subject to the additional tax for early distributions and will not be subject to income tax if the participant has complied with the Roth five-year rule and all other Roth requirements.

Age 62 — Early Social Security benefits

Age 62 is the earliest age that an individual may collect non-disability Social Security monthly payments. Note however, that anyone electing early Social Security benefits will receive a reduced benefit of between 20 percent to 30 percent depending on the number of months between the election to receive early benefits and the age at which the individual would be entitled to receive full benefits. Taxation of Social Security benefits depends on the amount of benefits received and other income of the individual, if any. The Social Security Administration website provides a calculator to determine the amount of monthly payments, as well as additional taxation that may be applied.

The age at which an individual should apply for Social Security benefits is a complex decision dependent on many factors. If possible, individuals should consult with a financial advisor or other professional to determine the most advantageous age at which to elect benefits.

Age 65 — Medicare eligible

Individuals will be automatically enrolled in Medicare parts A & B if they are already collecting Social Security benefits. If the individual has not yet started collecting Social Security, he or she will need to apply for Medicare directly. To ensure benefits begin in a timely manner, it is suggested that such individuals apply for Medicare benefits three months prior to the individual’s 65th birthday. They may do so at a local Social Security office, online, or by calling 800.772.1213.

Age 66 or 67 — Full Social Security retirement age

Likely due to increased longevity, the Social Security Administration has increased the age at which an individual is entitled to receive full Social Security benefits from age 65 (for those born in 1937 or earlier) to age 67 (for those born in 1960 or later). The chart above shows the gradual increase in the full retirement age based on the individual’s year of birth.

Age 70 — No additional increases

While full Social Security benefits are payable at age 66 or 67, depending on the individual’s year of birth, he or she is not required to begin collecting benefits at that time. Instead, such individual may delay receiving Social Security benefits for one or more years until age 70. This delay will result in an increased monthly benefit of 8 percent for each year of delay. Note, however, that the individual will no longer receive additional increases beyond age 70. Therefore, there is no reason to delay taking benefits after age 70.

Age 70½ — Potential start of RMDs

The RMD (required minimum disbursement) rules apply to all employer-sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) governmental plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs. Last, but not least, the RMD rules apply to Roth 401(k) accounts, but do not apply to Roth IRAs while the owner is alive. The RMD rules generally require that minimum distributions must begin to be distributed to the participant (or beneficiary, as applicable) no later than April 1 of the year following the year in which the participant turns 70½, or retires, if later (unless the individual is a 5 percent or greater owner of the business for non-IRA-based plans). Remember that the second RMD must be taken by Dec. 31 of that same year. Thereafter, the RMDs are due annually by the end of each year.

Keeping these dates in mind and making financial and retirement contribution and distribution decisions based on the best options available will assist in making the best retirement decisions.

Income tax laws are complex and subject to change. This information is based on current interpretations of the law and is not guaranteed. Neither Nationwide, nor its employees, its agents, brokers or registered representatives gives legal or tax advice. You should consult an attorney or competent tax professional for answers to specific tax questions.