Holding Money

Image source: Flickr user Steven Dipolo.

There are several important milestone ages along the road to retirement and beyond -- for example, at age 62, you can collect Social Security if you choose to do so. At age 59 and 1/2, you can begin to use your retirement accounts. However, 70 is particularly important because it's the age where you have to do these things.

Social Security at 70
You can choose to file for Social Security at any time after you turn 62, and waiting longer to start collecting benefits is beneficial -- to a point. That point is age 70.

For Americans at or near retirement now, full retirement age for Social Security purposes is 66 years old. This is the age that your Primary Insurance Amount is based on -- that is, the amount of Social Security income you'll receive if you start collecting at exactly your full retirement age. Filing for benefits earlier or later will adjust your benefit as follows:

If you file at age....

Your benefit as a % of primary insurance amount...

62

75%

63

80%

64

86.7%

65

93.3%

66

100%

67

108%

68

116%

69

124%

70

132%

Note: This is accurate for individuals born 1943-1954.

As you can see, your benefit goes up by 8% for every year you delay Social Security until age 70. However, there is absolutely no financial benefit to waiting any longer. Your benefit amount will be the same if you start at age 70 as it would be if you wait until 75 (adjusted for cost of living increases).

The point here is that if you're approaching your 70th birthday and haven't filed for Social Security yet, it's a good idea to get the ball rolling. Applying is easy -- you can do so online at www.ssa.gov anytime that's convenient.

Required minimum distributions
Age 70 is also the time when you'll need to start thinking about withdrawing the money you've been saving in tax-deferred retirement accounts such as IRAs, 401(k)s, and 403(b)s. Roth accounts have no such requirements, since contributions are made on an after-tax basis.

Thanks to the strangeness of tax laws, age 70 isn't the exact trigger point. You need to start taking required minimum distributions (RMDs) from these accounts by April 1 of the year following the year in which you'll turn 70 and 1/2. For example, if you turn 70 and 1/2 at some point during 2016 -- meaning that you turned 70 between July 2015 and June 2016 -- you'll need to take your first RMD by April 2017. And you'll need to take another RMD in 2017 and every subsequent year, as long as there is money in your account(s).

If you're working, the RMD requirements don't apply to the money in your 401(k) or other employer-sponsored retirement plans. However, any money you have saved in an IRA is subject to RMD requirements whether you're working or not.

You can choose to take your RMD either in a lump sum or in payments, as long as the total is withdrawn by the deadline. In other words, if you calculate your RMD requirement for this year to be $40,000, you can choose to take it in monthly installments of $3,333. If you have more than one account, you can take your RMD from one or more accounts, as long as the total adds up to the required amount.

Your RMD requirement depends on the balance of your tax-deferred accounts as of December 31 of the previous year, as well as the ages of you and your spouse. Based on your life expectancy, the IRS provides an expected distribution period, and your RMD can be found by dividing your account balance by your expected distribution period found on either the "uniform distribution table" or the "joint life and last survivor expectancy" table if your spouse is more than 10 years younger than you.

Rmd Formula

As an example, let's say you're 70 years old and have a 401(k) balance of $800,000, and that you'll turn 70 and 1/2 during 2016. According to the uniform distribution table, you have an expected distribution period of 27.4 years. Dividing the balance by this number reveals a RMD of $29,197, which you must take before April 1, 2017.

The penalty for not taking your RMD is 50% of the non-distributed amount. So, in the above example, if you fail to take your RMD by the deadline, you could face a penalty of nearly $14,600.

A word of caution
If you're turning 70 and 1/2 in 2016, be careful about taking your RMD at the last possible minute. If you wait until early 2017 to take your first distribution, you'll have to take another before the end of 2017, as subsequent RMDs need to be taken before the end of the calendar year.

Since distributions from tax-deferred retirement accounts are considered to be taxable income, taking two RMDs within the same calendar year could easily bump you into a higher tax bracket and end up costing you thousands more in taxes.

While you technically have until April 1, 2017 to take your first RMD if you turn 70 and 1/2 in 2016, it may be in your best interest to do so before the end of 2016.

You can't afford to get these wrong
It may seem inconvenient to be required to take RMDs from your retirement accounts if you really don't need the money, and it may seem annoying that you can't delay Social Security indefinitely and let your benefit amount grow.

However, the consequences for not doing so are harsh. As I mentioned, the penalty for failure to take your RMD is 50% of the amount you were supposed to withdrawal. And, while there is technically no "penalty" for choosing not to file for Social Security by age 70, you'll be giving up a significant amount of income, with absolutely no financial benefit. In a nutshell, these are two things you absolutely must get right when you turn 70.

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