Reaching certain ages can be meaningful for financial planning. Age can affect contributions and withdrawal rules from retirement accounts, social security and pension options, and even taxes as many aspects of the tax code are linked to age.
Here are a few significant ages and planning considerations.
50: Eligible to make catch-up contributions to retirement accounts
55: Eligible for penalty exceptions for certain withdrawals from employer retirement accounts
59 ½: Eligible for retirement account withdrawals without early distribution penalty; Potentially eligible to move money from an employer plan to an IRA while still working
60: Beginning in 2025, additional catch-up contributions allowed
62: Earliest age to claim social security (at a reduced benefit amount)
65: Eligible for Medicare coverage (pay attention to enrollment period, which opens prior to 65th birthday); Increase in standard deduction
67: Full retirement age for social security for most people (depends on birth year)
70: Maximum social security benefit is reached
70 ½: Eligible to make Qualified Charitable Distributions
73 or 75: Required minimum distribution age from retirement accounts (depends on birth year)
Integras Partners provides financial planning and investment management to our clients. We have a deep relationship with our clients and understand their needs and goals. The planning process is integral to investment allocation decisions.
Changes to the FAFSA form and the formula for determining a family’s need for aid are changing, effective for the 2024-2025 school year. While all the changes are beyond the scope of this post, here we highlight two from a financial planning perspective.
Parent Income:
Contributions (pre-tax salary deferrals) to employer retirement accounts are no longer added back to parent income. This could be an additional incentive for parents with employer plans to max out contributions in years that the FAFSA looks at income. The FAFSA looks at the year two years prior to the beginning of the school year. For example, the 2024-2025 school year looks at 2022 income. Note that this change only applies to contributions that come straight from a salary reduction. Contributions to IRAs that are deductible on the tax return are still added back to parent income.
Grandparent Contributions: Up until now, while grandparent (or other non-parent) owned 529 accounts did not count towards a parent or student’s assets, withdrawals from said account counted as income to the student which had to be reported on the FAFSA. This could reduce the student’s aid eligibility. With the changes, withdrawals from a third-party owned 529 account will no longer count as student income. Grandparents can now maintain a 529 account for their grandchildren and distribute funds without impacting aid eligibility.
Because of these changes, the 2024-2025 form will not be available until December this year. You can stay up to date on announcements at https://studentaid.gov/, or through college financial aid office websites.
Call us to review your investment approach (404) 941-2800.
If you are already charitably inclined there are two gifting strategies that you should be aware of, Qualified Charitable Distributions (QCDs) and gifting appreciated stock.
In Strategies for Charitable Giving – Part 1 we discussed the tax benefits of QCDs which can be done by IRA owners who are at least 70.5 years old. But what if you are younger and giving to charities? Are there any tax benefits available? Most people take the standard deduction since the Tax Cuts and Jobs Act increased it, and if you’re not itemizing you lose the ability to deduct charitable contributions.
If you have appreciated stock (owned for more than a year) in a taxable investment account, donating stock instead of cash could provide a tax benefit to you and result in a greater gift to the charity.
Let’s look at an example.
Jim plans to donate to his favorite charity. He owns $30,000 of Microsoft stock that he purchased several years ago for $5,000. Jim is subject to 15% capital gains tax. If he were to sell the stock, he would pay $3,750 in taxes, leaving him with $26,250 to donate. If Jim is able to itemize his tax deductions, he would be able to deduct $26,250.1
If, instead, Jim donated the stock directly to the charity, he would avoid paying the capital gains tax. The charity receives the full $30,000 value, rather than $26,250. And if Jim itemizes, he may be able to deduct the full $30,000.1
To be eligible for a charitable deduction for this tax year, donations of stock need to be received by the end of the year.
Determining charitable giving strategies is one way that we partner with clients. We can help you determine if donating appreciated stock is right for your situation.
Call us to review your investment approach (404) 941-2800.
If you are already charitably inclined there are two gifting strategies that you should be aware of, Qualified Charitable Distributions (QCDs) and gifting appreciated stock. To realize tax benefits for 2023, both need to be done before the end of the year.
Qualified Charitable Distributions:
If you are an IRA owner and are age 70.5 or older, you are eligible to make QCDs. Most people take the standard deduction since the Tax Cuts and Jobs Act increased it, and if you’re not itemizing you lose the ability to deduct charitable contributions. QCDs are gifts to charities made directly from your IRA. Normally, money that you take out of an IRA is taxable income, but QCDs are excluded. So, you are getting money out of your IRA tax-free to give to charity.
Once you’re subject to RMDs (currently at age 73), QCDs are even more beneficial because they count towards satisfying your RMD. If you’re between 70.5 and 73 there is still an extra advantage in that the QCD decreases your IRA balance, which may reduce required minimum distributions in future years.
Let’s say that you are 71 years old, are already gifting to charities every year, and have an IRA. You have social security income which you supplement with money from your investment accounts, all of which is taxed before it hits your checking account. You’re writing checks to charities throughout the year – giving away money that you have already been taxed on. Making QCDs allows you to fulfill your charitable goals with money that you are not taxed on. And because you are reducing the balance of your IRA with these gifts, your RMDs will be lower than they otherwise would have (all else equal) when you turn 73.
There are a few things to note about QCDs, such as annual limits and which charities can accept QCDs. Determining charitable giving strategies is one way that we partner with clients. We can help you determine if QCDs are right for your situation.
In Strategies for Charitable Giving – Part 2, we discuss the strategy of gifting appreciated stock.
Call us to review your investment approach (404) 941-2800.
Long-time employees face this non-revocable and permanent choice upon retirement. While the security of lifetime income can be comforting, several trade-offs exist.
Do I want to rely on the company’s future financial strength? How long will I live? What will inflation do to my pension income over time? What happens if I die? Should I take a lower amount to protect my spouse? What happens if they die? Do I have a choice to take a lump sum and control how and when I spend the money?
Pension distributions are limited to lifetime income options without future inflation adjustments. Additionally, If the income beneficiaries die early, there is often no remainder. Many companies offer a “lump-sum distribution” to effectively buy the retiree out of their pension obligation. This amount can be transferred to a traditional IRA tax-free.
There are several advantages to taking the cash.
Freedom to invest the money, timing and adjusting your income, and protecting your heirs. Lump-sum buyouts are calculated using a specified interest rate, so the lump-sum payout value increases in low-rate environments; it increases the lump-sum payout value.
Once you start a pension, you’re locked in. From an IRA, you might take an increased amount until you start Social Security, allowing you to defer and increase your Social Security payment for both you and your spouse. If you have a life event, you can adjust IRA distributions. You cannot adjust a pension. You may downsize your home, get an inheritance, or need to spend a chunk of cash on a new car or family need. A lump sum allows flexibility a pension cannot. Plus, when you die, there is likely an inheritance, which a pension does not offer.
Integras Partners separates lump sum funds into different IRAs, keeping money for short-term needs conservative while allowing assets needed later to grow. Having more time for the remainder to stay invested reduces market risks. Having control of the funds also protects your heirs. Employing good strategies should increase both lifetime income and protect your family.
Most importantly, a “lump-sum rollover” gives you the peace of mind to enjoy what you’ve worked so long to earn truly.
If you’re interested in learning more, give us a call at (404) 941-2800, or reach out to us about your situation.
Here is a summary of your four options for this money:
1. Leave the money in the old employer’s plan.
401(k)s [and 403(b) plans for nonprofits] almost always have limited investment choices and often both investment and advisor expenses. You can access the fee disclosures, but most never do. If your old plan is under an insurance company, those fees are likely to be higher, as employers typically don’t subsidize fees under these providers.
If you reached age 55 in your last year with the company, you’re eligible to access funds without early withdrawal penalties. Consider leaving an amount you might need to withdraw before age 59 ½, which is the penalty-free age for IRA’s.
2. Move the balance to a current employer plan.
This is usually not the most beneficial move, as you are likely to still have double fees and limited investment choices. However, it could enable you to take a loan from the new plan. If this is something that you want to consider, ask your employer for the details.
3. Take a taxable distribution.
This option may only net you about 55% after taxes and penalties. Remember that retirement plan distributions are taxed as ordinary income, which means it is treated the same as payroll earnings for that year. Unless you need all of it, you’re much better off moving it to an IRA, with the goals of growing it for retirement and the ability to take distributions gradually over years.
4. “Rollover” the money to an Individual Retirement Account (IRA)
This is usually your best option. It’s not a taxable event; you’re likely to have much broader investment flexibility, and you could have lower overall fees. Like most discount brokerage firms, look for IRA account “custodians” without annual fees or trading commissions. Plus, if you have multiple former employer plans, you can consolidate them into one or more Rollover IRAs.
Remember, if you’re between 55 & 59 ½, to leave an amount you might use, as penalties on IRA’s are incurred prior to 59 ½.
