Age-Related Considerations in Tax and Financial Planning


	Jeff Bither

May 2011

Age-Related Considerations in Tax and Financial Planning

In an era filled with uncertainty, you can count on one thing for sure: Time marches on. This article covers some important age-related tax and financial planning milestones that you should keep in mind for yourself and your loved ones.

Age 0–23. The “Kiddie Tax” rules can apply to your child’s (or grandchild’s) investment income until the year he or she reaches age 24. Specifically, a child’s investment income in excess of the applicable annual threshold is taxed at the parent’s marginal federal income tax rates (typically 15% on long-term capital gains and dividends and up to 35% on ordinary income). For 2011 (as for 2010), the investment income threshold is $1,900. A child’s investment income below the threshold is taxed at very favorable rates (typically 0% on long-term capital gains and dividends and only 10% or 15% on ordinary income). Note that, between ages 19 and 23, the Kiddies Tax is an issue only if the child is a student. For the year the child turns age 24 and for all subsequent years, the Kiddie Tax ceases to be a concern.

Age 18 or 21. A custodial account that was set up for a minor child comes under the child’s control when he or she reaches the age of majority under applicable state law (18 in many states, including Arizona; 21 in other states). If there is a large amount of money in the custodial account, this issue can be significant. Depending on the child’s maturity level and dependability, you may or may not want to take steps to ensure that the money in the custodial account is used for expenditures of which you approve (like college costs).

Age 30. If you set up a Coverdell Education Savings Account (CESA) for a child (or grandchild), it must be liquidated within 30 days after he or she turns 30 years old. To the extent that earnings included in a distribution are not used for qualified higher education expenses, they are subject to federal income tax plus a 10% penalty tax. Alternatively, the CESA balance can be rolled-over, tax-free, into another CESA set up for a younger family member.

Age 50. If you are age 50 or older at the end of the year, you can make an additional catch-up contribution (up to $5,500 for 2011) to your 401(k), Section 403(b) or Section 457 plan, and up to $2,500 to your SIMPLE plan, assuming the plan permits catch-up contributions. You can also make an additional catch-up contribution (up to $1,000 for 2010 and 2011) to your traditional or Roth IRA (the deadline for making IRA catch-up contributions for the 2010 tax year is April 15, 2011).

Age 55. If you permanently leave your job for any reason, you can receive distributions from the former employer’s qualified retirement plan(s) without being hit with the 10% premature withdrawal penalty tax. This is an exception to the general rule that the taxable portion of a qualified retirement plan distribution received before age 59½ is hit with the 10% penalty tax.

Age 59½. You can receive distributions from all types of tax-favored retirement plans and accounts – IRAs, 401(k) accounts, pensions, etc. – and from tax-deferred annuities without being hit with the 10% premature withdrawal penalty tax. Before age 59½, the 10% penalty tax will be applied to the taxable portion of distributions unless an exception to the penalty tax applies.

Age 62. You can choose to start receiving Social Security retirement benefits. However, your benefits will be lower than if you wait until reaching full retirement age, which is age 66 for persons born during the period 1943 through 1954. If you also work before reaching full retirement age, your 2011 Social Security retirement benefits will be further reduced if your income from working exceeds $14,160 for 2011.

Age 66. You can start receiving full Social Security retirement benefits at age 66 if you were born in 1943 through 1954. You will not lose any benefits if you work in years after the year you reach age 66, regardless of your earnings in those years. However if you will reach age 66 this year, your 2011 benefits will be reduced if this year’s earnings exceed $37,680.

Age 70. You can choose to postpone receiving Social Security retirement benefits until you reach age 70. If you make this choice, your benefits will be higher than if you start earlier.

Age 70½. You generally must begin taking annual Required Minimum Distributions (RMDs) from tax-favored retirement accounts – e.g., traditional IRAs, SEP accounts and 401(k) accounts – and pay the resulting income taxes. However, you need not take any RMDs from Roth IRAs set up in your name. The initial RMD is for the year you turn 70½, but you can postpone taking it until as late as April 1 of the following year. However, if you chose that option, you must take two RMDs in that year: one by the April 1 deadline (the RMD for the previous year) plus another by December 31 (the RMD for the current year). For each subsequent year, you must take another RMD by December 31. There is one more exception: If you are still working after reaching age 70½ and you don’t own over 5% of the company for which you work, you can postpone taking any RMDs from the employer’s plan(s) until after you’ve actually retired.

Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market.