Having the ability to structure your income to help minimize taxes is just one of the advantages of optimizing your retirement savings. You should also avoid paying higher taxes or penalty fees, and there are certain regulations and rules you should be aware of. Here are three stages that may help you maximize the benefits of your retirement accounts.
Celebrate Catch-Up Contributions at 50
At age 50, workers with certain qualified retirement plans can make annual “catch-up” contributions in addition to their normal contributions. In 2022, you can contribute up to $6,000 to an IRA if you are under 50 and an additional $1,000 if you are 50 or older. Those who are 50 or older and participate in a Simple IRA or Simple 401(k) plan can contribute up to $17,000 per year for 2022. Those 50 and older can contribute an additional $6,500 to a 401(k), 403(b), most 457 plans, and a government Thrift Savings Plan in 2022 for a total of $27,000.[1]
Age 59.5 Brings Half Birthdays Back into Style
Thought half birthdays were for toddlers? Think again.
Once you reach 59 ½, you can withdraw from your IRA or old 401(k)s without penalty. If you are retired or have terminated employment and still have funds in your 401(k) plan, you can access them at age 59 ½ and pay no early withdrawal penalty tax. If you have rolled your 401(k) funds into an IRA, the rules are the same. [2]
Age 59½ is the earliest you can withdraw funds from an IRA account and pay no early withdrawal penalty tax. If you are still working, you can access funds from an old 401(k) plan once you reach age 59½, but you may not have the same access to funds inside the 401(k) plan at the company for which you currently work. Check with your 401(k) administrator to see if your plan allows what is called an “in-service” distribution at age 59½. Some 401(k) plans allow this, and others do not.
Don’t Forget Your Required Minimum Distributions at age 72
As of 2020, the SECURE Act changed the age at which Required Minimum Distributions begin from 70½ to 72. RMDs apply to qualified retirement plans such as 401(k)s, 403(b)s, Profit Sharing plans, Money Purchase Pensions, IRAs, Simple IRAs, and SEP IRAs[3]. Now, many retirees have more time to let their retirement savings grow tax-free. RMDs are the minimum you are required to withdraw each year, and you can always withdraw more than that amount.
However, some retirees would prefer to withdraw less than they are required to. Withdrawing more from a traditional retirement account could mean a higher tax burden and an end to tax-free growth for the withdrawn funds. If you forget to take an RMD, it’s going to cost you. There is a 50% penalty based on the RMD you were supposed to take.[4] RMDs are based on the total balance of all your IRAs, 401(k)s, and other traditional retirement plans as of December 31st of the previous year.
If you have questions about how to optimize your retirement accounts to minimize taxes and maximize your retirement savings, you can sign up for a time for a complimentary review with us of your financial plan.
[2] https://www.investopedia.com/articles/retirement/02/111202.asp
[3] https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions#:~:text=What%20types%20of%20retirement%20plans%20require%20minimum%20distributions%3F,-The%20RMD%20rules&text=profit%2Dsharing%20plans%2C%20401(,Roth%20401(k)%20accounts.
[4] https://www.aicpa.org/resources/article/dealing-with-rmd-shortfalls#:~:text=The%20basic%20required%20minimum%20distribution,50%25%20of%20the%20undistributed%20amount.
Disclosure:
Because investor situations and objectives vary this information is not intended to indicate suitability or a recommendation for any individual investor.
This is for informational purposes only, does not constitute individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance.
There are retirement account risks that could diminish investor returns, such as, but not limited to: low interest rates, market volatility, withdrawal timing and sequence of returns risk, government policy uncertainty and increased longevity. Prospective investors should perform their own due diligence carefully and review the “Risk Factors” section of any prospectus, private placement memorandum or offering circular before considering any investment.
Advisory services offered through Asset Strategy Advisors, LLC (ASA). Securities offered through representatives licensed with either Concorde Investment Services, LLC (CIS), member FINRA/SIPC, or RCX Capital Group, LLC (RCX), member FINRA. Insurance offered through Asset Strategy Financial Group, Inc. (ASFG). ASFG and ASA are independent of CIS and RCX.
