Retirement is supposed to be a time to enjoy the most precious years of your life – taking those long-awaited dream vacations, enjoying the grandchildren, and doing the things you want to do instead of the things you have to do. Retirement is also the time you’ll make some of the most important financial decisions of your life.
Simple Strategies to Avoid Paying More
Here are a few retirement mistakes you’ll want to avoid, or you could be faced with significant tax penalties:
Taking Social Security too early. Unless you were born in 1960 or later, you can begin receiving full Social Security benefits at age 66. But did you know that taking Social Security early, at age 62, reduces your monthly benefit by 30 percent for the rest of your life? If you delay retirement until age 70, your benefit actually increases by 8 percent per year.
Enrolling late for Medicare. You’re given a seven-month initial enrollment period to sign up for Medicare around your 65th birthday. If you continue working past age 65 and have group coverage, you have eight months from the time you leave your job to sign up for Medicare.
If you miss either of these enrollment deadlines, your Medicare premiums will increase 10 percent for each year you delay enrolling – and you’re stuck with these higher premiums for the rest of your life!
Taking early withdrawals from an IRA or 401K. If you make a non-qualified withdrawal from your IRA or 401K before age 59½, you’ll be looking at paying income taxes plus a 10 percent penalty. There are exceptions such as using the money for a down payment on a house or college tuition.
A 401K also allows you to begin withdrawals if you leave your job beginning at age 55.
Taking retirement distributions late. So we know you can be penalized for taking money from your IRA or 401K too early. But did you know you can get penalized for taking it out too late? Once you hit age 70½, you must begin withdrawing from your 401K and IRA, and there is a required minimum amount you must withdraw each year.
If you fail to withdraw the correct amount, not only will you be charged regular income tax, but you’ll also be charged a 50 percent penalty. That’s a pretty hefty penalty!
Although it can be tempting to make withdrawals to pay for vacations or luxury items, you can see how costly these decisions can be over the long haul. Planning ahead is the best strategy. It’s always best to speak with a financial advisor before making any of these kinds of crucial financial decisions.
What are your strategies for making the most out of your retirement? Share your comments with us!