Navigating the Critical Ages of Retirement Income Planning

What is “Son of SECURE, or SECURE 2.0”? It is “Division T” of the much larger $1.7 trillion Consolidated Appropriations Act of 2023. It was signed into law on December 29^th and contained 92 provisions that are retirement-related. They were mainly intended to encourage savings and broader participation in retirement plans. There are also some revenue provisions. It is broken into sections: expanded coverage and retirement savings, plans, preservation of income, and revenue provisions. There is a lot of Rothification going on in this new bill, and there is also one section designed to clarify the rules.

There are amendments and technical corrections, but there is a resounding theme of continuing to put the worker or employee in the driver’s seat, enticing them to start participating in plans, mainly if they work for a small business.

Mission Critical Age 50 Retirement Planning

What do we know about age 50 and retirement planning? It is the first age at which someone can make a catch-up contribution, which had stayed the same since 2001 when catch-up contributions were enacted.

For IRAs, it has always been $1,000 since they were enacted. It has never been indexed, so part of the changes under 2.0 is that it will finally be indexed starting next year. Starting next year for 401(k)s, 403(b)s, and 457(b) plans, catch-up contributions for employees, the bill says, that had income in the prior year of the plan in excess of $145,000, which will be indexed, must be made on a Roth basis.

With Secure 2.0, catch-ups for employees with compensation in excess of $145,000 will be made on an after-tax Roth basis does not apply to SIMPLE IRAs.

Age 55 Separation from Service Rule

The age 55 separation from service is an exception to the 10% penalty. The 10% penalty usually goes away at age 59½. But in certain instances, if someone participates in a qualified plan, like 401(k), 403(b), TSP, defined contribution plans, not IRA-based plans, and they separate from service in the year they attain age 55… what does that mean? That means if I am 54 this year and get let go or I leave my job, whatever the case may be, as long as I am going to be 55 this year, the year that I separate from service, I can take money directly out of my 401(k) plan of my employer without paying the 10% penalty.

Let’s return to age 50 for a second because you can substitute age 50 for certain public safety employees such as police officers, firefighters, and border patrol officers. The same thing applies to them. If they take funds directly out of the plan at age 50, they will pay tax but not the penalty. Something that changed with SECURE 2.0 is they added private sector firefighters, state and local police, and those with 25 or more years with that same employer, even if they are not age 50.

What are the finer points about the age 55 exception? One is, and I say it twice, it must come directly to the employee. All bets are off if someone takes that money from the plan and rolls it into an IRA. They have lost the ability to take money out without paying the penalty, okay? Think about the people you work with who say, “Oh, I left my job, but I need to bridge income. I need income from this pot of money.” Then, it is very important then to leverage this opportunity. “You take the amount that you need directly from that plan. Take what you need and pay the taxes on it, and then roll the rest to an IRA for later money,” for post-59½ money.

What happens if someone requests an eligible rollover distribution from a workplace-defined contribution plan? There is a mandatory federal withholding of 20%, which is not necessarily bad because they will set it aside for use from ages 55 to 59.

Now, if someone says, “Well, I just separated from service, and I am 53. Can I just let it sit until I am 55 and then take the distribution?” I hope you say, “No, you cannot do that.” It is a simultaneous requirement in the same year.

Age 59 ½ In-service Withdrawals

A common question is, “When can my client take an in-service withdrawal from their 401(k)?”

What is a normal distribution? A normal distribution, in IRS speak, is when you do not pay a 10% penalty; the code on the 1099-R is a seven. That is what you want it to say in Box 7, which is a normal distribution. It is not a “one” or a premature distribution. But it has to occur not in the year that you turn 59 ½, like the 55 exception. It must occur at or beyond age 59 plus six months to qualify as a penalty-free exception unless you meet one of many exceptions, such as death, disability, and first-time home purchase up to $10,000.

SECURE 2.0 has added a $1,000 emergency withdrawal annually starting in 2024 across plans or IRAs. Another allowable distribution was added for those who are “terminally ill,” that would be certified by a physician that the person is expected to pass within seven years. This option is available immediately. Another one is for domestic abuse, which would be the lesser of $10,000 or 50% of the vested account balance. All these go across types of qualified plans and IRAs and are effective in 2024, and they can be paid back within three years.

There is a hardship withdrawal and a non-hardship in-service withdrawal, which most people ask about. “My client would like to gain access to this because they do not like the investments in this 401(k). They would like to roll it into the IRA where they have more choices.” Let me save you and your client a headache by telling you how the IRS looks at this. The portion the employee contributes on their behalf can never be taken out as an in-service, non-hardship withdrawal before age 59 ½. So, suppose the majority of their balance is their elective deferrals and a nominal portion that is the match or the nonelective employer contributions, and they are only 50. In that case, the IRS does not allow it.

Most employers usually do not have an in-service withdrawal provision that starts before age 59½, and they do not have to offer it. It’s not the same as an in-service hardship withdrawal, which serves an immediate financial need that some other source cannot rectify.

Age 60 Social Security Widow/Widower Benefits

In limited cases, you might encounter someone entitled to a widow’s benefit earlier than 60. Most of the time, it is 60, but 50 if they are disabled. Generally, this is the earliest age. If I take a widow’s benefit that early, it will be reduced; I will not get the whole survivor PIA.

The survivor PIA is 100% of what the deceased spouse was either collecting at the time of their death or entitled to collect at the time of their death. That is the amount I would receive if I took it at my survivor’s full retirement age, which can sometimes differ from the full retirement age. People are surprised that it can be reduced by as much as 28.5% if someone takes that benefit at age 60. Sometimes it makes sense, especially if they can switch to their maximized retirement benefit at age 70. That is absolutely an option.

The other thing that catches a young widow or a widower off guard is, “Well, I went to Social Security, and they told me that I cannot collect the benefit, and there is no explanation given.” They do not understand why, and my first question is, “Hey, how old are they?” If they are age 61, my very first question is, “How much are they working?” and “How much do they earn?” because even though it is a widow or a widower and you would think that they have some special graces to that, a widow/widower’s benefit is still subject to the earnings limitation that applies to early claims for benefits.

The same rule applies to retirement benefit claims made early, and spousal benefit claims made early also apply to survivor benefits. So, for example, this year, the earnings limitation for someone under full retirement age for the whole year is $21,240. So, if a widow or widower makes $100,000, Social Security will send them away because they are about $80,000 over the limit. They could reduce their benefits by half of that, or $40,000, more than they could ever receive in a year. They do not explain it to them.

Knowing income limits apply and at what age someone could collect a widow or widower’s benefit is beneficial to help clients navigate survivor benefits, as they often go unclaimed and unnoticed, particularly if they do not have somebody in their corner that understands and knows that there is an opportunity to leverage benefits. For example, say you are dealing with a young widow or widower who has also earned income. Comparing the widow’s benefit and their own retirement benefit at age 70 is important because they can take one benefit before the other or hold out before switching to the other benefit.

Suppose that someone took their retirement benefits at 62. Their spouse unexpectedly passes away, and that benefit is greater. Let us say that their spouse is collecting $3,500 a month, and they are only collecting $2,000 a month. If they go to Social Security, Social Security will say, “Well, the survivor benefit is higher. Just go ahead and take that at age 62. We will just step you up to the difference,” right?

They are going to lose the lower of the two benefits. “But we will step you up to that higher benefit.” No, you will not get $3,500 because it will be reduced. After all, you are below your full retirement age. But you are going to get more. That is what they will say. What they do not say is “…or you could stay on your retirement benefit of $2,000 a month, and when you get to full retirement age, then make the election to switch because then you will collect that $3,500, or 100% of that survivor benefit, for the rest of your life.”

It also works the opposite, right? Say I am working with a person whose spouse dies young, and their survivor benefit is smaller than their benefit if alive and working at 70. They could elect to take just the widow’s benefit as early as possible and then switch over to their own maximized retirement benefit at age 70. These are the things that Social Security will not tell you, so they are important to know.

The other important thing concerning widow and widower’s benefits is that remarriage at 60 or later does not negate the ability for a survivor to go back and collect a survivor benefit from a former spouse, even a former ex-spouse. Say I was married to someone who passed away while in my 50s; for example, if I remarry before 60, I cannot go back and collect a survivor benefit from that person’s record. But if I wait until age 60 or later, I can. The same would be true if I were married to that person for ten years. As long as I do not remarry until age 60, I can go back as an ex-spouse and request the survivor benefit from that person’s record. Now, if I have ten years of marriage and that person is alive, and I remarry, I cannot collect anything. But as a widow from an ex-spouse, I absolutely can. So, these are critical things to remember about age 60.

Now we pivot from survivor benefits and address supercharged catch-ups. What is this? Starting in 2024 for 401(k), 403(b), 457, and TSP plans, catch-ups are increased for ages 60 to 63, a finite period. So, when someone reaches ages 60 through 63, they get to contribute the greater of $10,000 or 150% of the normal catch-up limit at that time. This cannot be used in conjunction with the special 457(b) catch-up. It is a significant opportunity to boost catch-up contributions in those final few years when people usually have their highest earnings.

SIMPLE IRAs and SIMPLE 401(k)s. Again, same thing, but a smaller amount of $5,000 or 150% of the normal limit. Secure 2.0 says that if you earn more than $145,000 in the prior year from the employer, you must use a Roth account for the catch-up contributions. This is not just for the 60 to 63 ones; they are for catch-up contributions in general. Again, this particular component does not apply to IRAs or SIMPLE IRAs because it obviously is a revenue-generating provision for the IRS. It is not a bad thing, as it is important to diversify your assets and have Roth elections anyway. These supercharged catch-ups will be indexed at the beginning of 2026.

Age 62: Earliest Claiming Age for Social Security

Age 62 for claiming Social Security is not necessarily the right age, but I will not say it is wrong. It depends on the person, but it is a permanent reduction. Generally, it forces a caveat to everything.

But when someone files early at age 62, they will experience a permanent 30% reduction to their retirement benefit unless they did a do-over and withdrew their application. Please be mindful of this when working with people who say, “Hey, I want to file for benefits now. I want also to work,”; you need to ask about this.

Anytime someone says, “I am going to file for benefits early,” the very first question should be, “Are you working?” If they say “yes,” “How much?” because of the earnings limit of $21,240 (2023) for someone who is under full retirement age for the whole year. People miss it, and it is not good when they miss or do not disclose it. Last year, for some reason, I got a host of questions from people that said they got LDOs, which are legally defined overpayment notices from SSA. They are not fun to receive. It could be two years when it finally catches up. They get a letter that says, “Our records indicate that you earned X amount over the earnings limit. We paid you X amount too much. Please send us a check back. Thank you very much.”  So, make sure that they understand if they will exceed these limits.

The earnings limit goes up to $56,520 (2023) for the year that someone attains their full retirement age and only up to the month before FRA. The good news is that the earnings limit goes away at full retirement age. Other good news is that it is truly only a limit on earned income, and it is only the earned income of the person claiming early, not that of their spouse. It is not a limit on IRA distributions or pension income.

If they have earned over this limit, Social Security withholds benefits. If they know upfront, and they should because when you file an application it asks if you are over the income limit, Social Security says, “Okay. Well, you are going to make $10,000 over the limit. So, we will withhold the first $5,000 of your benefits before paying you a cent this year.” For someone who is trying to use it to supplement their earnings, this does not work well since they can only get benefits for the however-many months once Social Security recovers their excess income. Then you have to ask if there is a better way to supplement income, such as accessing home equity through a reverse mortgage as an income bridge or whatever else they have at their disposal.

What is deemed filing? If I want to collect a spousal benefit, whether I am a non-working spouse who never earned a dime or I think it will be higher than my own, my spouse has to file. But I will only collect that spousal benefit if it produces a more significant benefit than mine. If I have earned a retirement benefit, my benefit will be paid first. For folks that have a primary insurance amount of $1800 – $2,000 a month, there is no point in trying to figure out if a spousal benefit is higher because the maximum spousal benefit is roughly between $1,700 – $1,800 right now at the best-case scenario for someone who has been a higher-earning, maximum earner their entire lives.

The earnings limit applies to early or pre-full retirement age benefits as well. The maximum spousal benefit is 50% of the other spouse’s primary insurance amount. What does that mean? If the primary insurance amount of the higher wage earner, for example, is $2,000 at full retirement age – that is what PIA is – then the maximum spousal benefit is $1,000. If that higher-earning spouse claims at 62, my spousal benefit is still $1,000. That is my starting point.

Conversely, if my spouse waits until age 70 to file, my maximum spousal benefit is still 50% of his full retirement age benefit, okay? Whether or not I get that full 50% depends upon when I file for it. A reduction always follows the claimer, so ensure your clients know about their full retirement age.

The reduction factors are different for spousal benefits versus retirement benefits. The maximum reduction for someone who files at 62 is 30% for retirement benefits, while the maximum reduction for spousal benefits is as much as 35%. So, be mindful that these reduction factors are different.

Another opportunity at age 62 is that a reverse mortgage becomes available. Two-thirds of people’s wealth is in their home equity. That is astounding, and this needs to be considered. People think, “Oh my gosh. I am retirement savings poor,” but adding all that back in can be another solution to an income problem.

What is the eligibility for this? First, the home must be the primary residence, and it must be owned outright or have significant home equity and no federal tax delinquency. The person must enroll in a HUD-approved reverse mortgage counseling program. The homeowner must be able to cover the property taxes, homeowner’s insurance, and other fees. They borrow against the home equity through a line of credit, or they can receive a stream of tax-free income.

“Free income” is like music to my ears, as there are few sources of income in retirement that do not affect Social Security taxation or potentially affect Medicare premiums, such as reverse mortgage income or qualified Roth distributions. Distributions from cash value life insurance in most cases, qualified health savings account distributions, and qualified charitable distributions are other sources.

The other thing is that repayment of the reverse mortgage balance plus interest is not due until the borrower moves, sells, or dies. It is a non-recourse loan and allows seniors to stay in their homes and near their families. There is no adverse effect on Social Security benefits or Medicare premiums because the income is tax-free. It is not how much you save but how much you keep, right?

Age 63 Retirement Planning

Age 63 is not a typical age we talk about, and the reason I do is because it catches people off-guard.

Now, people working longer may still have credible health insurance coverage under an employer-based plan with 20 or more employees. But if they enroll in Medicare at age 65, then to determine what Medicare Part B premium and Part D premium they will pay, Social Security looks at their income from two years prior. They might need to pay an income-related monthly adjustment amount (IRMAA) on top of their standard Medicare premium.

So at age 63, ask clients when they plan to enroll in Medicare to avoid Roth conversions or a significant capital gain. However, situations like “I was working at age 63, and I was in the most top-earning years of my career, and now you are going to ding me for it now that I am retired” are life-changing events that they can get out of. But things like Roth conversions are not technically in the landscape of life-changing events.

Someone highly concentrated in pre-tax assets might say, “Well, I will take the hit.” The good news is that when someone gets bumped into a higher Medicare premium band, it is only for one year because Social Security looks at the next year’s income every year. So, 2023’s Medicare premiums are based on 2021’s income; next year’s premium will be based on 2022 income. So, sometimes paying the piper for one year might make sense to get into a better tax position. Just be mindful of it because people do not want to be surprised when you are trying to do tax planning, things like diversifying from a tax standpoint, and forget about this point.

The IRMAA is a cliff regime; for example, if you are single and making under $97,000, your premium is $164.90 (2023); if your AGI is $97,001, they are going to pay $230.80 instead of $164.90.

Age 65 Retirement Planning

There are special Medicare enrollment periods for people who have health insurance coverage from a workplace plan that allows them eight months from when they lose the coverage. Retiree health coverage and COBRA do not qualify for a special enrollment period.

But in general, you want to remind your clients that before 65, they need to consider the Medicare Initial Eligibility Period (IEP). They need to enroll because they do not want to lose out and do not want to pay a lifelong penalty. Generally, they can enroll the three months before their 65^th birthday, the month of their 65^th, and the three months after. It is a seven-month enrollment period. If they miss it and do not have a good reason, like they were covered under creditable coverage, they will pay lifelong penalties for every 12 months they miss.

I will not spend much time on taking Social Security Benefits at full retirement age but know the takeaway here is that everyone needs to know when that is because a) it is the moment they can get 100% of their promised benefit; 100% of their PIA, not less, not more, and b) It is also when the earnings test no longer applies.

The primary insurance amount is based on the highest 35 years of indexed earnings. So, the longer someone works to fill those 35 years, the better for their primary insurance amount calculation. It is also the latest age at which someone will get a higher spousal benefit than their own, or let us say it is a non-working spouse; waiting beyond full retirement age to take a spousal benefit does not get you anything.

You do not earn delayed retirement credits on a spousal benefit. So, take it at full retirement age, assuming the worker’s spouse has filed. Delayed retirement credits do not apply to spousal benefits. Still, they apply in the survivor world, meaning if I am a higher wage earner and choose to wait to take my benefit, my surviving spouse, a lower wage earner, will benefit from that delay.

Mission Critical Age 70

This is the latest age anyone should ever file for Social Security.

Trust me and believe that I have talked to people that said, “Well, I am still working, and I am now 73. I never filed.” Do not do that because you can only go back six months retroactively to claim your benefits. So, make sure that anyone you are working with always claims their benefit on or before age 70.

Also, if they were one of the lucky ones that could file restricted, they are collecting spousal benefits now and intending to switch over at 70; know this does not happen automatically, so make sure they contact Social Security to get those benefits switched over.

Retirement Planning for Age 70½

For years and years and years, this was the age at which RMDs started. Under SECURE 1.0, it changed to age 72. The same happened for qualified charitable distributions (QCD); they have stayed at 70½ for SECURE 1.0 and SECURE 2.0, which changed RMDs for people not already taking RMDs, to 73. At 70½, this is a fantastic opportunity to leverage charitable donations with RMDs, even before that. So, someone already giving to charity should switch and pivot immediately to a qualified charitable distribution.

This only applies to IRAs, not SEPs, SIMPLEs, or qualified plans. But for someone at least 70½ on the day that they make this QCD distribution, where it has to go directly to the qualifying charity, they can do a maximum of $100,000 per year per individual that owns the IRA. And guess what happens? Instead of getting maybe no charitable deduction at all, or a nominal one because I think, for a married couple, it is like $600 if you do not itemize, which hardly anyone does anymore, the charitable contribution is tax-free. It does not hit AGI; when they reach age 72 or 73, it also satisfies the RMD up to the amount of a QCD. This is huge.

The other thing is that QCDs have been around for a while and have yet to be indexed. Starting in 2024, a maximum of $100,000 will be indexed. In the past, if people wanted those funds to go to a charitable gift annuity, the answer was always “No.” With SECURE 2.0, they have added a one-time option to fund a charitable gift annuity of up to $50,000. Not $50,000 additional but $50,000 of the annual $100,000 charitable distribution limit. It can only be done once. Some limitations exist to make them suitable for charitable remainder trusts.

Again, QCDs are tax-free and do not require itemization on a tax return to take advantage of it. And once someone reaches RMD age, they can satisfy their RMD with it as well. If you are tithing for your church or some way, anyway, do it this way to at least take advantage of not having it added to your AGI.”

Mission Critical Ages 72 to 73.

Folks who were age 72 by the end of 2022 continue taking distributions beginning at age 72. Nothing changes for you. But the people that were not 72 by the end of last year can now delay taking their required minimum distributions until age 73.

This is good news for people who do not need the income. The bad news is that we are now fitting RMDs into a shorter period, adding more tax to the situation and possibly more left to heirs. Most heirs now have ten years for distributions, which also has implications.

Key Takeaways

We have covered many ages.

• Pre-age 59½ clients: See if they can leverage the age 55 or 50 exceptions if they are public service employees. Can they leave a portion of the monies in the qualified plan and leverage that to bridge the income and roll the rest into an IRA for post-59½ use instead of using a 72(t)-payment stream? This is draconian. If they are before 59½ and still working, ensure they take advantage of these catch-up contributions.

Consider a Roth election to diversify their retirement income. If they have historically done pre-tax, maybe start having them think about “Pay the piper now.” Let’s start doing a bit of post-tax elections in your 401(k) now because we do not know. If taxes are going to go up in retirement, it is a risk they take if they do everything pre-tax now.

• Age 59½ to 70 clients: If they are still working, assess whether in-service withdrawal opportunities exist. At age 59½, remember, if the employer allows for an in-service withdrawal provision, then that is the earliest age at which they will allow it. Again, they could stay later than that, but that is the earliest they could allow it for 401(k) for elective deferrals.

Discuss how to maximize the primary insurance amount for Social Security benefits. Remember I said it is based on their highest 35 years of work. If there are zeroes in that calculation, Social Security does not just pat them on the back and say, “You only have 20, and we will use the 20.” They use 20 of their earnings and 15 big, fat zeroes. Make sure they understand that working, even part-time, will bolster that eventual benefit by filling up those gaps.

It also breaks them apart from being dependent on a working spouse because if they say, “Well, does it make sense for me to go back to work or work if I can just get a spousal benefit?” However, what happens if you rely on the higher earner to claim a benefit? That higher earner has to file for the benefit. You have got a double-edged sword. We want the higher earner to wait a bit longer because that will be a good bit of income during a lifetime that can also pass onto the survivor. You want to start talking about Social Security claiming strategies long before they actually do make a claim and build that into holistic planning.

• Age 63: If they are getting ready to retire, should they use Roth conversions to diversify their tax buckets? If they plan on enrolling in Medicare, what is going on in the year they turn 63, or the two years before their retirement date if it is later? Talk about income solutions to maximize Social Security. Is there a better way to hold off on Social Security? Use a reverse mortgage strategy to hold off on taking Social Security.

• Are you working with widowed clients? Leverage their worker and survivor benefits. Social Security will not offer that up as a solution.

• Age 70-plus clients: Has the client filed for Social Security? If they have not, they need to. If they claim, they will only pay back two years’ worth of benefits, and only six months of retroactive benefits can be paid. Again, when someone hits 70, and they are getting to 70½, ask, “Are you donating to charity? Are you donating cash? Are you giving money to your church? Let us pivot and use your IRA money to do it because, pretty soon, at age 73, you will be subject to RMDs anyway.” But even if you are not, taking advantage of that charitable contribution is better because if you are not itemizing, you are not getting much of a tax benefit out of it right now. You might as well switch it, do it from your IRA, and then not have to pay the taxes on it.

You always want to calculate the effects of RMDs. Start doing that in a client’s late 50s, thinking about the long-term effects of the RMDs will affect future Medicare premiums, which might bump them into a different tier.

And finally, always review beneficiary designations. I have heard more horror stories about people that do not have beneficiary designations on their IRAs, qualified plans, and annuities. Whatever the case, make sure that their end-of-life wishes, and beneficiary designations are in order, and get the next generation involved. Who are the key players in their family? You want to get those people involved.