De Justica Colaborativa
Decisions, decisions. We all make dozens of them every day, from the mundane (“What should I eat for breakfast—cereal or a Pop-Tart?") to the more serious.
During the years leading up to and immediately following retirement, retirees and near-retirees have a number of important decisions to make—decisions that could have a big impact on being ready for retirement. Some of these decisions fall into the following four areas:
1. Timing of receipt of Social Security benefits —Currently, you may elect to begin receiving Social Security benefits as early as age 62. However, you will receive a larger payment each month if you wait until your full retirement age of 67 (if you were born after 1959) and an even larger monthly payment still if you wait until age 70 to begin receiving benefits.
Each individual’s unique situation will dictate when he or she should elect to begin receiving Social Security benefits. If you’re married, however, keep in mind that if you decide to wait until age 70 to receive benefits, you can still file for spousal Social Security benefits at age 66. If your spouse is collecting a Social Security benefit, this could boost your household income by half of this amount.
2. Enrolling in Medicare Part B —Currently, Americans are eligible to enroll in Medicare at age 65. Once eligible, though, you must enroll in Medicare Part B (which covers outpatient services and doctor’s appointments) within three months of your 65th birthday. Otherwise, a late-enrollment penalty may apply that would boost the premium amount by 10 percent for each year that’s delayed.
Note that this penalty is waived for individuals who maintain health insurance through an employer (or a spouse’s employer). However, it is retroactive if enrollment is not completed within the required time frame after this coverage terminates.
3. Early IRA withdrawals and 401(k) distributions —Withdrawals from IRAs before age 59½ are generally subject to a 10 percent early withdrawal penalty. However, this penalty may be avoided if substantially equal periodic payments are taken from the IRA based on life expectancy for at least five years, or until age 59½, whichever is longer.
The same early withdrawal penalty generally applies to withdrawals from 401(k) plans that are made before age 59½. However, individuals who are at least 55 years of age when leaving a job can begin to take penalty-free distributions from a 401(k), although federal and state income taxes will still be due upon withdrawal.
4. Company stock and IRA rollovers —Some individuals choose to rollover their 401(k)s into IRAs when they retire or leave their jobs. While there may be benefits to this strategy, it can be costly from a tax standpoint if the 401(k) contains highly appreciated company stock. However, a special rule applies to this “net unrealized appreciation” that may allow individuals to pay capital gains taxes, instead of ordinary income taxes, on this stock when it is rolled over into an IRA.
Meanwhile, when rolling over 401(k)s or other retirement assets to IRAs, it is generally advisable that the assets be transferred directly to the plan custodian, rather than to the individual. If you receive a check yourself, your employer must withhold 20 percent for the payment of taxes, and you will be required to roll the entire amount (including this 20 percent) into an IRA within 60 days or pay taxes and an early-withdrawal penalty on this amount.
Given the potential long-term financial impact of these and other decisions, it may be advisable to consult with an investment counselor and/or tax expert for help in making them.