Important Ages...

Once you reach age 50 you can make additional annual “catch-up” contributions to salary reduction plans, including 401(k) plans, provided the plan permits catch-up contributions. The allowable “catch-up” amount is indexed for inflation in $500 increments, and for 2022 is $6,500. If you contribute to an IRA, the catch-up amount for IRA owners is $1,000, and is not inflation-adjusted. Thus, the maximum contribution by a worker aged 50 or older to a 401(k) or similar plan for 2022 is $27,000 or to an IRA is $7,000.

A special rule applies for public safety employees aged 50 or older: If you withdraw funds from a government defined benefit pension plan and you are a qualified public safety employee who separates from the job after age 50, the 10% early withdrawal penalty (see “59½” below) does not apply to the original distribution from the plan. However, if the funds are rolled into an IRA or a defined contribution plan, any subsequent distribution (until you reach age 59½) is subject to the 10% penalty.

Starting in the year you turn age 55, you may be able to take a distribution from a qualified retirement plan (not an IRA) and avoid an early withdrawal penalty. This exception applies only where you separate from employment (i.e., stop working for the employer that is sponsoring the plan) after reaching age 55, and won’t apply if you retire from your job before turning 55 but wait until after your 55th birthday to take the distribution from the plan. Said another way: You must be age 55 or older, and then separate from employment, for an early distribution to be excepted from the 10% penalty.

A 10% tax (penalty) applies to premature (also termed early) distributions from traditional IRAs and qualified retirement plans, such as 401(k)s and others. This penalty applies to distributions made before you reach age 59½ (but see “55” above for an exception) and is 10% of the part of the distribution that you would be required to include in your income for the year of the distribution. There are several exceptions to the penalty – some available only for IRAs or only for employer plans, some for both types of retirement vehicles – that aren’t covered in this article. If you plan to make a traditional IRA or retirement plan distribution between your 59th and 60th birthdays, be sure to do it after you reach 59½. If you take the distribution too soon, you could owe the early distribution penalty.

When you reach age 62 you may be eligible to receive Social Security benefits. Once you start claiming your benefits, whether at 62 or a later age, you should be aware that up to 85% of those benefits could be taxed. You may want to have the Social Security Administration withhold income tax from your monthly benefit payment or you may need to make estimated tax payments.

This half-birthday marks the point from which you can make a nontaxable qualified charitable distribution (QCD) from your traditional IRA of up to $100,000 per year. This distribution needs to be made directly by the IRA trustee to an eligible charitable organization for the distribution to be tax free. However, you won’t be able to claim a charitable deduction for the amount that is a QCD.

Distributions to a private foundation or a donor-advised fund aren’t eligible. If filing a joint return and both you and your spouse have an IRA, the $100,000 limitation applies to each of you. Caution: be careful on the timing since a distribution from an IRA made to a charitable organization in the year you turn 70½, but prior to the date you reach age 70½, is not a qualified charitable distribution and would therefore be taxable.

 To prevent an individual from investing in tax-deferred retirement plans, including a traditional IRA, but never withdrawing from the plan, the account owner is REQUIRED to take a MINIMUM (as calculated per IRS regulations) DISTRIBUTION (RMD) beginning in the year the IRA owner reaches the mandatory beginning age, which is currently 72. For the first distribution year, you are allowed to put off the distribution to as late as April 1 of the following year.

Legislation enacted in the last few years permits taxpayers with earned income to continue contributing to their IRAs regardless of their age. Previously, contributions couldn’t be made once the IRA owner became 70½, which for decades was also the age that RMDs had to begin. Even though you may make a traditional IRA contribution at age 72 or older, you will still be required to take an RMD.

So now we have a complication when you can make a traditional IRA contribution and a qualified charitable distribution (QCD) after reaching age 70½. In this scenario if you make a QCD you are required to reduce the amount of the QCD that is nontaxable by any traditional IRA contribution you made and deducted after reaching 70½, even if the IRA contribution and QCD are not in the same year