There are milestones in the aging process that trigger financial change. For example, once you turn age 62, you qualify for reduced Social Security benefits. At 65, you become elgible for Medicare Insurance. The final step is that at around age 66, you will be entitled to full Social Security.
This year, I turn 70 and by October I reach 70.5 years of age. The IRS requires mandatory withdrawal from any 401(k) or IRA (Individual Retirement Accounts) in the year you turn 70.5. There is a formula that determines how much a person must withdraw from all his accounts. It starts at approximately 5% of the value of the accounts at age 70.5 and escalates to 10% of the remaining values at age 90 (yeah right, I'll live to be 90). This means I now have to pay taxes on my "mandatory" withdrawals. As Grasshopper No.5 would say "darn".
If I have the facts right, I do not get an increase in Social Security this year because "cost-of- living" is so low. I don't know about your world, but I haven't seen many reduced prices. My medical insurance for prescription drugs has increased. Now I must withdraw 5% from retirement plans and pay more federal and state taxes.
I admit that I knew how the tax laws affect retirement income. The 70.5 age withdrawal rules are stated very clearly in every retirement document. Like everything else, as long as I hadn't reached 70.5, the rules didn't apply to me. Now they do.
The good news is that I got to protect retirement"savings" from taxes for up to 25 years. Savings do grow at a faster rate if you do not have to pay federal and state taxes when you set the money aside.
I must say my financial year is starting out very well. Grasshopper No.1 sent me homemade chicken soup for my cold, Grasshopper No.3 bought me a breakfast and a car wash (part of Christmas) and Grasshopper No.5 paid for lunch at Hu-Hot (part of Christmas). I guess all these "free-bees" offset my financial difficulties. Keep it coming!
The lesson Grasshoppers is that 401k (and IRA) plans are just one part of retirement planning. When used effectively, they can be powerful tools. Learn the rules.
Love,
Dad