What to Do in the Year Before Retirement Part 2

In the year before retirement, there are many decisions you should make or begin thinking about that could impact you for the rest of your life. These decisions may involve things like your retirement accounts, pensions, Social Security, and other retirement resources. The following tips and considerations can help with those decisions.

Decide when to begin Social Security benefits.

The age when you begin receiving Social Security benefits will have a significant impact on your monthly benefit amount.

Although you can generally begin receiving benefits at age 62, the longer you wait to begin benefits, up until age 70, the larger your monthly benefit will be.

For an estimate of how much you may receive per month if you begin at age 62, full retirement, or age 70, check out your Social Security statement, which you can review online at www.ssa.gov.

If you will be collecting benefits based on your spouse’s work record, you may want to wait until your full retirement age to begin benefits so that you can receive the maximum spousal benefit, which is half of the amount your spouse is entitled to at his or her full retirement age. If you begin sooner, the amount of your spousal benefit will be reduced.

Decide what to do with your 401(k) and other qualified retirement accounts.

When you retire, you’ll generally have three options for how to handle the savings you hold in your employer’s qualified retirement plan. You can leave your money where it is, transfer it to an IRA, or take a cash distribution. Each option has its benefits and limitations.

The first two options – leave your savings in your current plan or transfer them directly to an IRA – preserve the tax benefits that your savings currently enjoy. Your savings can continue to grow tax-deferred or tax-free if they remain in the employer’s plan or the IRA. This third option – cash out the account – will generally have immediate tax consequences. The taxable portion of the cash distribution will be taxed as income in the year you receive it and may also be subject to a 10% tax penalty if you are not yet age 59 1/2.

Retiring early? Plan how to avoid penalties on early withdrawals.

Normally, withdrawals from IRAs and workplace retirement plans prior to age 59 ½ are subject to a 10% early withdrawal tax penalty. Fortunately for people who retire early, there are exceptions to the “age 59 ½” rule” that may allow you to tap your savings before without incurring a penalty.

One exception states that if you leave your job in or after the year you reach age 55 (age 50 if you are a qualified public safety employee), withdrawals that you make from that employer’s qualified retirement plan after you leave are penalty free. This exception applies to 401(k) plans, 403(b) plans, and certain other qualified retirement plans. It does not apply to IRAs.

An exception that applies to IRAs and qualified retirement plans allows penalty free withdrawals before age 59 ½ if the withdrawals are part of a series of substantially equal periodic payments.

For assistance in developing a strategy or planning in your last year before retirement, consult with us. With offices in Rutland and Williston, Vermont Copper Leaf Financial develops a customized wealth management plan designed to integrate every aspect of your financial life. Our approach is to provide clarity and calm amidst the chaos. Where there is uncertainty, we look for facts. We call our approach evidence-based investing. Call us today at 877-974-5341 to schedule a strategy session and begin building your road map to financial success.

For more tips on what to do in the year before retirement, check out Part 1 and Part 3 of the series! 

Article published in January 2021 edition of Eye on Money. If you would like to be added to our mail list please email jennifer@dh-cpa.com.