Pay Attention to These Milestones |
In an era filled with uncertainty, you can count on one thing: time marches on. Here are some important age-related financial and tax milestones to keep in mind for you and your loved ones:
For the 2007 tax year, the Kiddie Tax ceases to apply to a dependent child's unearned income (typically meaning investment income), starting with the year the child turns 18. For younger children, a dependent child's unearned
income in excess of the annual threshold is taxed at the parent's marginal federal rate (which can be as high as 35 percent). For 2008, the applicable annual threshold is $1,800 (up from $1,700 in 2007). A child's unearned income below the applicable threshold is taxed at more favorable rates.
Starting in 2008 for calendar-year individuals, the Kiddie Tax rules can potentially come into play until the year an affected child reaches age 24. However, the new age-24 rule only applies to certain students. If the Kiddie Tax affects your child, part of his or her unearned income (typically from investments) will be taxed at your higher marginal federal income tax rates instead of at your child's lower rates.
Did you set up a custodial account for your minor child to help pay for college or save on taxes? It will come under the child's control when he or she reaches the local age of majority (generally, age 18 or 21 depending on your state of residence).
If you set up a Coverdell Education Savings Account (CESA) for a child or grandchild, it must be liquidated within 30 days after he or she turns 30 years old. Earnings included in a distribution that are not used for qualified education expenses are subject to federal income tax, plus a 10 percent penalty. Alternatively, the Coverdell account balance can be rolled over tax-free into another CESA set up for a younger family member.
At this age, you can begin saving more for retirement on a tax-favored basis. If you're age 50 or older as of the end of the year, you can make an additional catch-up contribution to your 401(k) plan (up to $5,000 for 2007 and 2008), Section 403(b) plan (up to $5,000), Section 457 plan (up to $5,000), or SIMPLE plan (up to $2,500), assuming the plan permits catch-up contributions. You can also make an additional catch-up contribution (up to $1,000) to a traditional or Roth IRA.
If you permanently leave your job for any reason, you can receive distributions from the former employer's qualified retirement plans without being hit with the 10 percent premature withdrawal penalty tax. This is an exception to the general rule that a 10 percent penalty is due on distributions received before age 59 1/2.
In addition to this exception, there are a number of other instances when you can take penalty-free withdrawals. For example, you might be able to take distributions if you are disabled, to pay qualified higher education expenses, for a first-time home purchase, and to pay health insurance premiums if you are unemployed.
For any reason, you can receive distributions at age 59 1/2 from all types of tax-favored retirement plans and accounts without being hit with the 10 percent premature withdrawal penalty tax. This includes IRAs, 401(k) plans, pensions and tax-deferred annuities.
At this age, you can elect to start receiving Social Security benefits. However, your benefits will be lower than if you wait until reaching full retirement age (see "Age 65+" below). When considering this election, look at your health and your family's history of longevity.
Also, if you continue working after starting to collect benefits but before reaching full retirement age, your Social Security benefits will be further reduced if your income from working exceeds $13,560 for 2008 (up from $12,960 for 2007). In the year you reach full retirement age, a higher earnings threshold applies. Your benefits will be reduced only if your earnings exceed $36,120 if you reach full retirement age in 2008 (up from $34,440 in 2007).
After years of paying into the system, you can start receiving full Social Security benefits. However, the age to collect full benefits is creeping upward. For example, if you were born in 1940, the magic age to collect is 65 years and 6 months. If you were born between 1943 and 1954, it's 66. And if you were born in 1960 or later, you will have to wait until age 67 to collect full benefits.
Want to keep working? You won't lose any benefits if you work in years after the year you reach full retirement age, regardless of how much money you make.
You can choose to postpone receiving Social Security benefits until after you reach age 70. If you make this choice, your benefit payments will be increased by a certain percentage (depending on your date of birth) than if you started receiving them earlier.
Important: If you decide to delay retirement, be sure to sign up for Medicare at age 65. In some cases, medical insurance costs more if you delay applying for it.
You generally must begin taking annual minimum required distributions from tax-favored retirement accounts (including traditional IRAs, SEP accounts and 401(k) accounts) and pay the resulting income taxes. However, you need not take any such mandatory distributions from your Roth IRA.
The initial minimum required distribution is for the year you turn 70 1/2, but you can postpone taking that payout until as late as April 1st of the following year. If you chose that option, however, you must take two minimum required distributions in that following year (one by April 1st, which is the one for the previous year) plus another by December 31st, which is the one for the current year). For each subsequent year, you must take your minimum required distribution by December 31st.
There's one more exception: if you're still working after reaching age 70 1/2, and you don't own over 5 percent of the employer, you can postpone taking any minimum required distributions from the employer's plan(s) until after you've retired.
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