Milestones mark significant developmental points in life. When most people reflect on their birthday milestones, past or future, 50, 65, and 73 don’t usually rank. But as retirement draws nearer, these birthdays are financially significant to mapping out your golden years. Learning about the notable stops on the retirement-planning route can help savers minimize their tax burden, optimize their returns, and refine their strategies.
Age 50: Catch Up if You Can
The perk of turning half a century is the newfound ability to begin filling in gaps in retirement savings. The requirements for retirement contributions change at age 50, allowing participants in 401(k), 403(b), and most 457 plans to contribute $7,500 beyond the $23,000 standard for a total of $30,500 in 2024. Additionally, employees who are 403(b) holders, age 50 and over, with at least 15 years of service, may be eligible to make contributions above the regular catch-up. For individual retirement accounts (IRA) in 2024, the catch-up contribution is $1,000 more than the standard contribution of $7,000 for a total of $8,000. [1]
Catch-up contributions inherently add value to retirement accounts but also have tax advantages. Catch-up contributions to traditional 401(k), 403(b), and most 457 plans are tax deductible. Since after-tax funds comprise Roth IRA contributions, they don’t provide immediate tax savings. However, earnings compound tax-free, and withdrawals are tax and penalty-free as long as they occur after age 59 ½ from an account open for at least five years. Participants may even be able to lower their tax bracket through catch-up contributions.
SECURE 2.0 Act
One thing to note: beginning Jan. 1, 2026, Section 603 of the SECURE 2.0 Act of 2022 states that employees whose prior-year wages from their current employer exceed $145,000 (indexed) to make any catch-up contributions as Roth (post-tax).[2]
Reassess Risk and Rebalance Portfolio
Age 50 is a great time for savers to reassess their risk capacity and tolerance. With 15-20 years until retirement, priorities in this age group may shift toward protecting wealth with a more stable, conservative portfolio. They may have children in college or getting ready to go. Maybe they want to be more tax efficient. Financial advisors always recommend regular portfolio reviews and adjustments. However, age 50 is a good time to tune up and rebalance as necessary for a new level of risk tolerance.
Reap AARP Savings
The American Association of Retired Persons (AARP) opens membership to people starting at age 50, another cause for celebration. With discounts, programs, and services, it’s worth taking advantage of the membership benefits.
Age 65: Benefits Mount
At age 65, the financial benefits continue with an increased standard tax deduction. For the 2023 tax year, the single-filer deduction for people under age 65 was $13,850, and for married filing jointly, $27,700. For people 65 and older, the single-filer standard deduction was $15,700, and for married filing jointly, $30,700 (both spouses).[3] A higher deduction can reduce the taxable income for people 65 and older.
Enroll in Medicare
Age 65 aligns with Medicare eligibility, which can substantially improve healthcare costs in retirement. Eligibility begins three months before an individual’s 65th birthday, and the enrollment window lasts seven months. There are consequences to delaying enrollment, which is important to know upfront. Medicare premiums increase 10% for every 12 months of eligibility without enrollment, so eligible individuals should join as soon as possible.
Age 73: Take Your Minimum Distributions
The SECURE 2.0 Act raised the RMD age from 72 to 73, effective January 2023. This is a critical point in the retirement journey. At age 73, minimum distributions take effect. IRS-mandated required minimum distributions (RMDs) are the required amount one must take from their retirement accounts to avoid penalty. RMDs ensure that individuals eventually pay taxes on their tax-deferred retirement savings. Account balance and life expectancy dictate the withdrawal requirement for an individual. While one can always withdraw more than the minimum, there could be financial and tax ramifications.
As mentioned, penalties apply for individuals who do not take RMDs on time. The IRS assigns a 50% excise tax relatable to the RMD amount, but this can be reduced if corrected within two years or potentially waived if the shortfall is addressed and was due to reasonable error. A financial advisor can help clients plan and create a strategy for managing RMDs and taxes.
The tax implications on retirement income streams surprise many retirees. An SHP Financial advisor can help you understand the retirement-planning milestones and prepare you for the financial shifts that come with them. Together, we can create a plan unique to your needs and goals so you can gain the most from your retirement years. Whatever birthday you are approaching, 50, 65, or 73, we wish you a happy one. Contact us at SHP Financial for a complimentary review of your finances today.
Sources
[1]https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000#:~:text=Therefore%2C%20participants%20in%20401(k,to%20%2430%2C500%2C%20starting%20in%202024.
[3] https://www.irs.gov/pub/irs-pdf/p554.pdf
