Transcript

Wiser Financial Advisor – Must Know Retirement Deadlines

Hi everyone, welcome to the Wiser Financial Advisor show with Josh Nelson where we get real, we get honest and we get clear about the financial world and your money. This is Josh Nelson, founder and CEO of Keystone Financial Services. Let the financial fun begin!

Josh: Today you get the benefit of two Certified Financial Planners and that’s really important because the Certified Financial Planner designation is the gold standard in our industry. So you always want to work with a CFP. Welcome, Jeremy Bush, fellow Certified Financial Planner.

Jeremy: Thank you very much for having me, Josh.

Josh: Today we get to talk about numbers. We like numbers. We like math. We like measuring things. One of the fun things about getting older is that you reach certain ages that allow you to do different things. So take advantage of it. That’s really what we’re here to talk about today. Knowing the rules helps things go smoothly, whereas not understanding the rules can not only mess you up, sometimes it costs you money. And sometimes it’s just an opportunity lost. So that’s really what we’re talking about today—the milestones and what hitting these milestones will allow you to do as far as opportunities.

Jeremy: Like you were saying, it’s important to take advantage because you don’t hit 50 every day. And once it’s gone, it’s gone. And so most of these things we’ll talk about involve a limited timeframe or very specific timeframe and so it’s pretty important to act when you can.

Josh: These are conversations that we have every day with people we work with concerning a lot of different clients in a lot of different situations. But as you can imagine, many of the people that we work with are people that are at least on their runway toward retirement, if not are already retired. I myself have only a couple of years before I get a letter from AARP telling me that I am eligible to join. But at age 50, there’s also something else that happens. What is that, Jeremy?

Jeremy: Age 50 is really what’s called the catch-up contribution age. I think most of us, when we’re younger, we’re contributing to things like a 401K or IRA. So you have that limit, right? So for instance in 2023, if you’re under the age of 50, that contribution limit is $22,500 of your own money that you can be putting towards your 401K. When you hit 50, you can do an additional catch-up contribution of $7500 more. So you can see that if you start at 50 and you go till 60 or 65, that’s a pretty big chunk of change that you could be missing out on if you’re not taking advantage of it.

Josh: Yep, absolutely. And one distinction on this too is that you just have to turn 50 that year, so you can have a birthday on December 31st, but that doesn’t mean you couldn’t have been making contributions all year that year. And we used that term 401K as a blanket term, but you might have a 403B or something else. Just know that you’re also gonna be eligible for some kind of a catch-up contribution. It may not be exactly the same, but that’s one to really be alert to as far as what your employer offers, and really dial that in for what your benefit might be. So definitely work with somebody that understands those limits.

Jeremy: And then additionally, those numbers are typically indexed for inflation. So what the number is this year is not necessarily going to be what the contribution limit is for the next year or five years from now.

Josh: Yeah, we just got those limits for the next year. For 2024, we’re studying that right now. So stay tuned. And the next age that we’re going to talk about today is age 55. This is one that a lot of people aren’t aware of. I’d say most people are not aware of. What happens when you turn 55?

Jeremy: This is probably the one that’s least used I would say. At 55, if you lose or leave your job, there is an eligibility option for taking distributions from your 401K or your IRA without taking a penalty. The general rule is 59 and a half for that IRA or 401K penalty age. Once you get past that, there is no further penalty, but if you have to leave your job prior to 59 1/2 and you are 55, there are rules that are basically an exception to the rule. They’ll waive it for this. But this is one where you definitely want to work with a financial professional because it’s super easy to screw that up and then end up paying penaltiesThere are very specific steps you need to take in order to take advantage of that.

Josh: Yep, there are a lot to gotchas on all of these things, so take this overview today with a grain of salt. Not that we’re giving you wrong information, but just know that it all depends. Every situation is a little bit different and there might be some new ones with your employer or how you leave your employer or something like that, which might make you eligible or not eligible for this.

Which brings us to age 59 and 1/2, and that is a big age. A lot of people are aware of this and wonder why the half, by the way. Who knows? I have no idea who came up with that. But that’s the point where we no longer have to worry about early withdrawal penalties for most retirement plans.

Jeremy: Yeah, that’s the age where that 10% automatic early withdrawal penalty drops off. It says OK, now that you’ve hit 59 1/2, you can go ahead and start taking distributions. You’re still gonna have to pay taxes on them from those pre-tax plans, but you do no longer have that penalty involved.

Josh: That’s a good distinction too. Most retirement plans are pre-tax plans and so not only is there a penalty, but there are income taxes on top of that when we start drawing money out. If you have a Roth IRA, you won’t be taxed but you still have to wait until that age 59 1/2. Then the penalty goes away. Iff you follow all the rules, you wait until 59 1/2 or older unless you apply for some other exception in there you will have that as tax-free solution.

Jeremy: It would be a true shame to NOT be 59 1/2 and try to take money from a Roth IRA and end up paying a penalty.

Josh: And usually when people find out about this stuff it’s a couple of years after they do their return and they get the letter in the mail from the IRS and, of course, the IRS’s computers are getting better and better at this stuff, right? They’re catching these things. It’s not even humans anymore, right? They’re catching things based off of the forms that are supplied to them by your IRA provider or your employer. So just know that more than likely they are going to catch up with you on this stuff. So it’s very important to understand the rules. Which brings us to age 62. That is really important for a lot of people, especially if you plan on retiring early.

Jeremy: 62 is what marks your very first age when you’re eligible to start claiming Social Security. Now, that opens a really big window of time when it comes down to Social Security. You can start at age 62, but most of the time, it’s not recommended. We financial planners are always in the mentality of waiting to full retirement age if you can, but sometimes it does make sense to take it as early as you can. Sometimes people like to wait until that very last minute, but at 62, if you choose to take your Social Security, you will be taking a permanently reduced benefit for the rest of your life.

Josh: Recently I read something that’s hard to believe. 70% of people that are eligible for Social Security retirement benefits start them at 62. They take it at the reduced benefit. I’ve got to think that for a lot of those people, it’s probably because of hardship. They’re probably in a situation where they were forced to leave their employer early. Maybe they just have got to have the money and they don’t have investments or retirement plans or other things to live off of while waiting for the benefit to go up. So probably there are some sad situations. Certainly, that 70% figure also tells us there are a lot of people just electing to take it early for various reasons.

Jeremy: And we hear those reasons all the time. You know, I think you’re right. though. Most of the time it’s people that just don’t have any other funds to live on and things are getting too tight, and they want to be retired. But there are other reasons. There are a lot of factors involved in Social Security timing. So at age 62, it does open another option to you for that income while you’re living in retirement.

Josh: Yeah, it’s a choice. After 62, the amount is prorated. So you get about a 7 % increase every year that you wait. You get that by just sitting around, not doing anything. Of course, that’s money you could have taken and spent and done something with. You could even invest it. So you have to take that into account. But you do get a reward, right? A 7% reward every year up until full retirement age. And after that, you get an 8% increase up until age 70. So the nice thing about working with us is that we do a thorough Social Security break-even analysis for all of our clients. So when you get to that point, you’ll be able to see exactly what the math says, and then you can make an educated decision. Ultimately, that’s gonna be up to you, right? It’s your money. It’s your benefits. But at least you’ll know the math behind it to make a good choice for yourself. So 62, at least you have the choice at that point of starting to draw Social Security. One other nuance that doesn’t apply very often, thankfully, but if you’re a widow and you’re eligible for Social Security widow’s benefits, you can draw as early as age 60. So if that is your situation, or if you know somebody, that could be a choice. They could take a reduced benefit as early as 60. Again, there are a lot of gotchas. That’s why we have jobs, because this stuff is so complicated. There’s so many things that are individual based on your situation. It’s very hard to give cookie cutter advice, because it’s not going to be the same for everybody.

Age 65 is a big one. A really big one. We see a lot of people retire at age 65. In fact, they say that 10,000 people per day right now in America are turning age 65. And that triggers what?

Jeremy: That triggers Medicare. So 65 is the magical Medicare age. And this has a definite gotcha to it. They give you a nice big window to sign up, right? It’s three months before you turn 65, the month when you turn 65, and three months after that, You have a seven month window during the year that you turn 65 to enroll in Medicare. If you do not, there are penalties that can last the rest of your life. We’ve done entire webinars just on Medicare and all the things that go with it, but for purposes of today, we want to just bring up that age 65. So if you’re nearing 65 or you’re right there, make sure you’re looking at this stuff. I you need to talk to somebody, we have plenty of resources for you as far as a specialist who can help walk you through what you need around Medicare.

Josh: You’ll know when it’s coming, by the way, because when you turn 64, your mailbox is going to start filling up with marketing stuff from every health insurance company under the sun that would love you to buy their medical supplement insurance.

Please note that if you’re still working—and a lot of people are still working at 65—and if you’re covered by your employer’s coverage, you may be able to stay on that, but you’ll need to check with your employer because your employer will require you to apply for Medicare to be able to stay on their coverage. Then the employer coverage acts as a supplement. So again, lots of gotchas based on your plan and your age. Lots of moving parts here that you need to be aware of.

Many people continue working up until 65 simply because of the health insurance. Medicare typically is a lot less expensive. So for a lot of people, that is their trigger point for retirement.

And the next milestone is full retirement age, which depends on what year you were born.

Jeremy: When we say full retirement age, that’s really justthe Social Security definition of when can you start receiving your full retirement benefit. Not the reduced amount. When you hit full retirement age, you can still have income and collect Social Security, and your Social Security benefit will no longer be infringed upon by whatever income you have.

Full retirement age is a moving target. Eventually we will move out of this, but it now depends on your year of birth. If you were born between 1943 and 1954, your full retirement age is 66. If you were born between 1955 and 1959, it’s going to be age 66 plus some odd months. There’s a calculator out. Each year is a two-month increase in age. And if you were born in or after 1960, your full retirement age will be age 67.

Josh: That’s a good distinction, about being able to work as much as you want and draw benefitsWhen I started in this business back in 1999 with the old rule, it didn’t matter how old you were—if you had a job and you earned anything substantial, they would start withholding your Social Security benefits. Now, once you hit full retirement age, they say work as much as you want. And of course there are people like Warren Buffett, who is well into his 90s right now and he can still draw his full Social Security benefit. Which I’m sure he is. And he’s still working at Berkshire Hathaway, so good for him.

Now, if you take Social Security before full retirement age, you can have dividends and capital gains and take money out of your IRA, but they will only let you make $21,240 of earned income in 2023 before they start having some of your benefits withheld You do get the money back once you hit full retirement. That money would get amortized and spread out over your entire life. So is it worth it? Probably not. It’s probably not worth drawing your benefits if you think you will still have substantial earnings.

But again, it all depends on your situation. It depends on if you’re married and who you worked for, and all kinds of stuff that plays into this decision. Which brings us to waiting until age 70. Not a lot of people do this, but you could wait up until age 70 to take benefits.

Jeremy: Yeah. And then, once you hit 70, that is as big as your Social Security benefit is ever going to be. It no longer increases. So from the time you hit 62 all the way up to age 70, your Social Security benefit is increasing each year that you don’t take it. As soon as you take it, that’s what gets locked in.

So, full retirement is at 66 plus some months or 67. If you choose not to take it at full retirement age, you don’t have to. You can just keep putting it up until age 70. That is a way to maximize what it is in there, of course. There are a lot of other factors that go into it. We can put X amount of things into our calculators for calculating out how you can get the most benefit, and every single time it would come back and say wait until you’re age 70 because you’re going to mathematically get the most benefit. But that is only if you live until at least age 85. If you don’t think you’re going to live to 85, or you have questions about the liquidity and viability of Social Security in the future, maybe there’s a reason to take it before then.

Josh: Yep, absolutely. And that’s unknowable. Is the program likely to change over time? Yeah, I’m sure it will. It has in the past. It probably will in the future. Who knows what those changes might be? So it’s pretty difficult to plan for that. But knowing the rules that we’ve got, I think the one thing that always applies is longevity. And really, that’s what we do the calculations on. That’s what we’re solving for. In the end, how long do you think you’re gonna live? Take it at an earlier age if you don’t think you’re gonna make it that long. Maybe you’ve got some kind of a chronic illness, something like that, then it would be a no brainer. You’d start drawing that benefit as early as possible. Now, if you’re married, again you have to look at that and say, ”Now it’s not just one life. Now we’re talking about two lives. Potentially that higher benefit would continue on and it’s beyond the scope of today’s talk, because we could spend a whole hour on spousal benefits and when a spouse should take their benefit. For now, just know that there’s also a spousal benefit in Social Security. There are divorced spouse benefits. There are also widower’s benefits. So there’s all kinds of stuff that gets thrown into the mix with Social Security. We could talk about that for a long time. Just know that it’s very important to understand the rules.

Another age to be aware of that is really weird is age 70 ½.

Jeremy: That age used to be when Required Minimum Distributions (RMD) would start, but now that’s been moved out some, which we’ll get to in a second. But 70 1/2 now is still the age for qualified charitable distributions. What is qualified charitable distribution? It’s really the opportunity to take money from your IRA directly, and give it to a charity of your choosing, as long as it’s a valid 501C3 charity. That’s one of the only ways that you get to take a distribution from your IRA without being taxed on it. You can give it to a charity and they don’t get taxed on it either.

Josh: Yep. And the weird thing about it is that you use the same table. So it’s almost like a fictitious Required Minimum Distribution that you don’t have to take, but you could take, right? Starting at 70 ½ you can start transferring it to charity. And so you might say, “Why would I wanna do that?” Number one, you’d have to be charitably giving anyway. It doesn’t make sense for those of you who aren’t doing that right now. This is for people who are already making plans to do this. Basically, it would be taxable but you can turn it into a tax free distribution and have the charity get all of it, versus if you took after-tax dollars and donated to charity. In theory, at some point you’d be able to itemize that deduction, but it has to be quite high these days. Your standard deduction amount has gone way up and so more than likely you’re not putting enough in where you’d actually be able to benefit, but that charity always benefits, right? They’re gonna get the money. But you wanna make sure that you’re using the rules to your advantage and do it in this tax efficient manner.

Speaker 2

And I think really, so why that stemmed from 70, half, 70 1/2 like we’re talking about is because that used to be the age of required minimum distributions, right? And so I don’t know if this is the case, but in the back of my head, I like to think, yeah, Congress, they pushed forward that RDA age and they just kind of. Forgot about the QCD thing, right?

Speaker 1

I’m sure they did.

Speaker 2

Whether that’s true or not, who knows, but.

Speaker 1

Yeah, it seems like the tax code is cobbled together and there’s a lot of weird intricacy. So that’s because it is right. It wasn’t written at one time and as changes get made, there’s a lot of unintended consequences and maybe people working on different sections of it, right. And they’re not talking to each other. Oh yeah.

Speaker 2

I think that happens all.

Speaker 1

The time. Well, yeah, it it creates plenty of opportunities. The reality is sometimes because they do kind of miss something or forget, it’s not that we’re doing anything illegal, right. But w

We’re gonna use the rules to our advantage i. If if we can do it legally and it’s to your benefit.

T and then the last age here. And of course, we hope you live a lot longer than this. But at age 70. Three is 73. W, what happens at age 73?

Speaker 2Jeremy: As

73 as of now, 73 is the new Required Minimum Distribution, so this is one that I think I probably feel the most questions on now is because it was 70 1/2 and then theygot moved it to 72 and then they moved it to 73 with a caveat that’s. Depending on your year of birth, you might be out as late as 75. The basic idea is that if you turn 73 in 2023 or 2024, technically your required minimum age is going to be 73, so that’s when the IRS says you’ve been hanging on to the. IRA or, 401K money long enough, and we’re going to make sure that you take out a minimum a. Amount so that we start getting our taxes on it. You can still use qualified charitable distributions. They start at 70 1/2, but you can use them forever. Once you have RMD’s it counts against your RMD, but it you don’t have to pay any taxes.

Speaker 1

On it, yeah, there are definitely some tools, some strategies around this. One of those in particular is by doing Roth conversions well in advance if you’re a lot of years until age 73, you might consider either contributing to Roth. To begin with, or converting some of your traditional pre- tax dollars to. That way you’re not having to take as large as required minimum distributions. Once you hit that age, does not apply to routes or routes. Basically, you can leave until you die and then pass it on. At that point. There’s other rules for beneficiaries. We’re not gonna talk about that today cuz it’s a. Whole different. Yeah, yeah, yeah, different topic. But but there’s a lot of strategies around this because that could be burdensome for people who deferred deferred, defer that income. It could end up being a lot of taxable income that you’re forced to take. And if you don’t do the qualified charitable distribution. Options all of a sudden you start taxing or you start stacking income right. You get your Social Security income and dividends and capital gains. And now I’ve got this force distribution that I have to take for some people that can be a really big deal. So we definitely want to be planning ahead. The other nuance here too is that if you didn’t take your requirement distribution. And I don’t know too many people who missed this, especially if they work with us, right? I mean, we’re not gonna let them miss this. We definitely, definitely double check this stuff at the end of the year to make sure you’re taking your required amount. Make sure you know what it is. Certainly take any tax distributions and that’s straight to the IRS or your state if that’s applicable, but they do give you a little bit of a gotcha where you they give you a little grace period, right that first year it’s called your required beginning date actually is April first following the year that you turned 873. I think that’s exactly what that’s there. Somebody. Somebody. Crafted that legislation A gazillion years ago and they said what? Let’s give people a few months up until that April 1st to take that first distribution. So you could use that to your advantage. Just know that you’re gonna be doubling up then, right. If you are taking a late, that means that you’ll have to take that first one by April 1st and then. That year’s distribution, you’re going to take by December 31st, that’s normally the deadline. So just be a little bit careful with that. Also if you don’t take the RMD, if you just said forget it or you just forgot. Penalties 25% used to be 50%, so you’d lose half your money straight to a penalty. But keep in mind. That’s just the. Penalty. That’s not even taxes. So now you’re talking about 25% of the 25% penalty. Your federal income tax, your state income tax, you easily could lose half of the money right off the bat.

Speaker 2

Right off the bat? Yep, that’s pretty steep. It’s even. Yeah, like you were saying, it used to be 50%. Now it’s 25%. I’m guessing that’s probably because it caught some people. Yeah, right. And so this is 1 where it’s just really wise to be aware of what your RMD age is. The the required beginning date like you were talking about. I think they thought, yeah, well, as soon as people go to do their taxes, they’re going to realize that they did something wrong or they missed it. Right. That’s not something that I want to try. I want to. You know. Wait on my tax person to tell. Me. No, I would rather be aware of that upfront and plan accordingly as opposed to having to run to catch. Up and potentially pay a 25%.

Speaker 1

Penalty and they will. That’s why the benefit of working with the certified Financial Planner is that not only is it our training, it’s our experience. We’ve got the proverbial 10,000 hours plus right to become an expert. Well, we’ve got that in you add that up in our team, we’ve got that many times over. So not only do we know the book knowledge side of things. We know experientially really how this stuff all plays out, and we know your situation. More importantly, that’s really what you want. Is you want somebody who knows you, knows what you want, and cares about you and cares enough about the details to actually put this into a plan and make sure that it’s covered. So with that, that’s a lot of different ages. I’d be curious if any of you catch one that we missed. Certainly e-mail us directly. That’s always fun too. We’ve got a lot of engineers that they’re very detail oriented people and we love that. When you give us feedback. So maybe there’s some age in there that we missed that definitely just shoot us an e-mail, give us that feedback. With that, yeah, definitely just wanted to thank everybody for their attention. We know there’s a lot of other things that you could be doing with your time busy holiday season coming up, but we appreciate you certainly pass on this to our your friends, your coworkers, any family that you think this would benefit from and certainly give us feedback on anything else that you’d like to hear. On the podcast, we always love that communications at keystonefinancial.com is the best way to pass that on. We’d also love it if you would subscribe to the podcast on. Your favorite service. Give us a rating, hopefully five stars, but give us a rating and I just wanted to say we appreciate you. God bless and have a great. We love feedback and we’d love it if you would pass it on to me directly at josh@keystonefinancial.com. Also, please stay plugged in with us, get updates on episodes, and help us promote the podcast by raiding us and also subscribing to us at your favorite podcast service.