Birthday Milestones: Your Financial Picture

Birthday Milestones: Your Financial Picture

September 02, 2020

Since ancient Roman times, birthdays have been celebrated, to mark the change in time. According to history, the German's invented the birthday cake, as we know it today, with one candle on top for each year you have lived, and then one additional for the hope of living at least another year. Over the years, different birth years have sparked various milestones offering different significances. When we were younger, the ages 16, 18, and 21 sparked feelings of adulthood and independence. The older we get, the decades seem to generate additional enthusiasm, and other years seem to go unnoticed. Yet starting with 50, many years signify financial milestones and should not go unmentioned.


The big 5-0 is the half-century mark and a huge birthday celebration.  As you are celebrating fifty and fabulous and celebrating the success in your life, don't forget it also marks an essential financial milestone. You are eligible for the catch-up phase. My first thought would be to catch up on some me-time after the kids are hopefully through school and off the payroll. Before you get carried away, don't forget, you are finally able to catch up on your retirement savings. Once you are 50 or older, the government allows you to contribute an extra $1,000 to an IRA. For 2020 you can contribute up to $7,000 to your IRA when you take advantage of the catch-up. The catch-up provision gets even better if you are a participant in a company-sponsored retirement plan. You can contribute up to $26,000.


Often, the old double nickel birthday goes unnoticed at least when it comes to financial milestones, although if you are no longer working for the company that sponsors your 401(k) or 403(b) 55 is a magical age. At age 55, you can start taking distributions from your company-sponsored retirement plan without the 10% penalty. You should keep that in mind if you are thinking of rolling your old retirement plan into an IRA. The IRA does not allow penalty-free withdrawals without special rules or exceptions until you are 59 ½. Fifty-five is also the age that employees in an employer-sponsored stock ownership plan can diversify their holdings. If the company stock represents a large portion of your holdings, spreading your risk among a more significant number of securities is probably a prudent move.

59 ½ 

For most people, we stop celebrating our ½ birthdays as young adult, but ½ birthdays make a comeback once we get older. Fifty-nine and a half is the time when you can start taking penalty-free withdraws from your IRA without those special rules or exemptions. While that can be very attractive, don't forget you will pay ordinary income tax on distributions from traditional retirement accounts. It is essential to plan your withdraws accordingly to minimize your taxes. Just because you can pull money from your IRA doesn't mean you should.


Traditionally age 62 has been the time when the world wants to reward you for six decades of experience by offering several senior discounts, which is excellent. Sixty-two also provides an opportunity to turn on some income; pulling your social security benefit becomes an option. You should understand that starting your social security benefits at age 62 means you will receive a reduced benefit. 


Once known as the age of retirement, 65 signaled full retirement age with full retirement benefits. With the increase in life expectancy, the Social Security Administration transitioned full retirement age to between 66 and 67, depending on the year of birth.  

Sixty-five can still be a cause for celebration, a vast majority of Americans become eligible for Medicare when they turn the magical age of 65. Signing up isn't automatic unless you are already getting social security benefits. Enrollment for Medicare is only available at certain times. You can begin signing up as early as three months before your 65th birthday but no later than three months following. If you miss your first enrollment period, costs will go up the longer you wait unless you have continued coverage through employer-sponsored healthcare. Employment is not a sure-fire free pass to ignore your enrollment period; coverage provided by a small employer may require Medicare to act as your primary coverage.  Your HR department can give you the information you need to make a smart choice.

Sixty-five continues to bring gifts with another financial milestone related to healthcare. You can now withdraw money from your HSA for any reason without penalty. Of course, if you use HSA funds for a nonmedical expense, you will have to pay income tax. Just don't forget the best part of an HSA, distributions are triple tax-free if you use the proceeds for medical expenses. 


As of December of 2019, we have a new age to add to the financial milestone list, seventy-two. The SECURE Act updates the age for the required minimum distribution (RMD) to age 72. Required minimum distribution is the term that refers to the amount the government forces you to take from your retirement accounts to force you to start paying taxes. They are pretty serious about this requirement; if you fail to abide, you will be subject to a 50% penalty on top of ordinary income taxes. Distributions are calculated based upon your account value and the uniform lifetime table, which reflects life expectancy. If you still work when you reach 72, you may not be required to take a distribution from your employer-sponsored retirement plan, but there is no exception for IRAs. 

I believe any birthday is reason enough to celebrate. Young or old, birthdays are personal observe each one in a way that is memorable for you. If you celebrate a year that signifies a financial milestone, pay attention to the details it can impact your retirement.

This material is provided as a courtesy and for educational purposes only. Advisory Services Network, LLC does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation.