Birthdays may signal time to take financial action

Bill Cass, CFP®, CPWA®

Bill Cass, CFP®, CPWA®, 05/10/23

Reaching certain age milestones can be significant for many different reasons. Beyond birthday celebrations and life changes, such as retirement, age milestones are meaningful for financial planning.

Milestones can trigger important tax and financial planning actions that may be missed. Talking with an advisor can help individuals and families plan and stay on track with their financial planning. In fact, age milestones play a large role when planning for Medicare or Social Security and making decisions about charitable giving or in-service non-hardship withdrawals from a retirement plan.

Many aspects of the tax code are linked to age requirements.

Milestones to watch can begin as early as age 18 for children. Here are some examples.

Age Planning consideration
18 Earliest age of majority for custodial accounts in some states, meaning an account should be reregistered solely in the name of a (former) minor
21 Latest age of majority for custodial accounts
24 Age when the “kiddie tax” does not apply anymore on certain dependents’ unearned income

Many savings accounts, particularly retirement accounts, have rules around withdrawals and even contributions, that are based on age.

Most people recognize age 65 as a key milestone when thinking about retirement planning. But, important birthdays that signal rule changes around retirement savings actually begin at age 50.

For a complete list of significant milestones, see “Important age milestones for financial planning.”

link to age milestones for financial planning

Planning considerations

It is important to understand how age milestones benefit or limit planning opportunities.

Consider Roth conversions before reaching certain milestones

Timing a Roth IRA conversion is key when it comes to certain age-based milestones, such as retirement or claiming Social Security. For example, converting to a Roth IRA shortly before age 65 may negatively impact Medicare premiums. This is because Medicare considers income from two years prior to enrollment at age 65 when calculating the amount of the premium. Those at higher income levels may face higher premiums.

Consider a qualified charitable distribution (QCD) if over age 70½

If you are not relying on an RMD to meet current income needs, and if you are planning to claim the standard deduction, consider donating IRA assets to a qualified charity. A special provision of IRAs allows account owners to donate up to $100,000 tax free each year to charity.

In-service, non-hardship withdrawals

Some 401(k) plans allow in-service, non-hardship withdrawals — without providing proof of hardship — if the participant has reached age 59½ or has met the requirements specified by the plan document. These participants have the option to directly transfer savings to an IRA without penalty or withholding, assuming certain conditions are met. Transferring savings from the employer plan to an IRA may allow access to a broader range of investment choices, for example.

It might pay to delay Social Security

One of the biggest mistakes retirees make is deciding to begin Social Security benefits too soon. In fact, about 60% of workers sign up for Social Security before reaching full retirement age. At this point, the benefit is significantly lower and may be more likely to be subject to a reduction in benefits for those still working. By delaying the start of Social Security benefits, retirees will receive higher benefits. In essence, they receive an 8% raise for every year they delay taking benefits up to age 70.

Take distributions before your RMD age

The original SECURE Act raised the RMD age from 70½ to age 72 effective in 2020. The new law further extends the RMD age to 73 in 2023 and eventually to age 75 in 2033. Even with the RMD age increased, you may consider accelerating income before the tax rates expire at the end of 2025, or if you are in a lower tax bracket. For those that are already subject to RMDs, consider taking larger RMDs than required to “fill up” favorable tax brackets, depending on personal tax circumstances.