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Birthday Milestones and Your Trusted Advisor

August 1, 2019

We all have milestones in our lives and, as we grow older, we want to celebrate them.

Most people invite family and friends to celebrations, but I urge you to also invite your CPA to the affair – their gift of advice could be more valuable than the mug that says ‘I Made it – Where’s the Party?’

When Your Child or Grandchild is Born

It is the best time to create a college fund, which can be started with any amount. The advantage of starting early matched with consistently adding to the fund and letting the resulting interest compound will lead to a secure basis for education.

Tax benefits include deferred growth and tax-free withdrawals if the funds are used for education, which, in the new tax law, includes elementary, secondary and, as previously provided for, college. If your child chooses not to attend college or the funds aren’t used, they can easily be transferred tax free to another child or family member – including yourself!

When Your Child Turns 14 and Can Get Their First Paying Job

You can set up an IRA in their name and contribute an amount up to their taxable wages (earned income). It is also a good time to get your teen into the habit of saving. Moreover, you don’t have to wait until the last day, April 15 of the following year, to contribute.

When Your Child Heads Off to College

Before you redecorate their room, you may want to keep in mind that the federal government expects parents to contribute to their child’s education and calculates college financial aid based on parental income. Even if your child is independent, your financial information is still included in the process. Additionally, college loan obligations in your name have a long-lasting impact on your credit score.

When Your Child Reaches the ‘Age of Maturity’

(i.e. the chronological moment when your child ceases to be legally considered a child)

This is usually when they turn 21. Hopefully by now they have moved out of your basement and are on their way to paying their own telephone bill and car insurance. If not, you may want to consider that the amount of support you are providing is considered a gift and goes into the ‘gift tax’ realm.

Both you and your spouse can each give each child and their spouse up to $15,000 (the annual exclusion in 2019 which is adjusted for inflation annually) with no gift tax consequences.

When Your Child Turns 26 and is Off Your Health Insurance Coverage

Health coverage for your adult child will typically end on December 31st of the year in which they turn 26 years old. Some plans, however, terminate coverage on their 26th birthday – you should check with your benefits department.

You don’t have to do anything to remove them from coverage – you do need to start talking to them about getting their own coverage to avoid the penalty on their income taxes for not having coverage. Open enrollment for the health care exchanges is in the fall, but the termination from your plan is considered a ‘qualifying life event’ for Marketplace Special Enrollment. Be proactive and plan ahead!

When You Turn 50

You can start making ‘catch-up’ contributions to your qualified employer sponsored retirement plan – up to $6,000 more per year. Or up to $1,000 more per year to an IRA if you qualify. So, when you blow out the candles on your cake, instead of wishing that your hair won’t turn grey, you can wish for some extra cash to put in your retirement fund.

When You Turn 55

If you left your previous employer during or after the year in which you reached the age of 55, you can take a penalty-free withdrawal from your 401(k) plan. This withdrawal is considered taxable income, but it won’t be subject to an early withdrawal penalty.

It applies even if you are not yet age 59 ½. It also applies if you have left your money in your old company’s 401(k) plan. However, if you rolled your old 401(k) plan to an IRA, this early-access provision does not apply.

If you are still working for the company, most 401(k) plans don’t allow for regular withdrawals at age 55. You may however be able to take a loan against your plan or qualify for a hardship withdrawal.

When You Turn 59 ½

What better excuse to celebrate your half-birthday than when you can finally withdraw money from your 401K and IRA without penalty. The income will be subject to tax though, so plan accordingly. If you don’t need the funds yet, it may be better to just leave them to continue growing, tax deferred.

When You Turn 62

Another day to celebrate – you can start claiming Social Security benefits when you turn 62. However, you may want to delay, depending on your income streams. If you can delay, your benefits will increase. However, if you can’t, it may make sense to start the process early.

The answer isn’t the same for everyone and planning is important in the year leading up to your 62nd birthday. With your CPA at your party, you can discuss your questions after you blow out the candles.

On Your 65th Birthday

This is the year that you become eligible for Medicare benefits. You will more than likely know about this well in advance as you will notice a slew of advertising for coverage in your mail. Don’t be distracted – even if you aren’t planning to retire when you turn 65, you should still sign up for the benefit now – or you may face penalty fines for late enrollment.

You can sign up 3 months before your birthday. Also, Medicare can be less expensive than traditional plans and includes options that may not otherwise be available.

When You Turn 66/67

You have reached full retirement age for Social Security benefits – the actual date depends on your birthday. You can keep working of course, and you won’t be penalized for earning extra income. You can continue to defer you benefits and reap a higher amount by doing so. It is a numbers game at this point and a great deal depends on what your plans and reserves are.

When You Turn 70

You have to start taking Social Security benefits by the time you reach 70 – they max out at 132% of the initial full benefit at full retirement age. Still living large? Think about using the funds to donate to your favorite charity or fund your grandchild’s college fund!

When You Turn 70 ½

Things get a bit complicated when you turn 70 ½. When you turn 70 ½, you have until April 15th of the following year to take your first required minimum distribution ‘RMD’ from your IRA or employer sponsored retirement plan. You will need to take the 2nd distribution by December 31st of that same year. Your subsequent distributions need to be taken annually. It is just that first year that you can defer the first RMD.

These are all important dates to put on your calendar and celebrate, not only for tax planning purposes (which is why I encourage you to include your accountant in the festivities), but also to celebrate reaching another milestone in your life.

How you plan is as important as how you celebrate and share your accomplishments.

We here at Mazars are well versed in all areas of retirement planning including income and gift tax planning, maximizing your social security benefits and minimizing your overall tax burden at whatever stage of life you find yourself. Be sure to check in with your trusted advisor along your journey and send them an invite to your next birthday party.