After Singing “Happy Birthday”, Sing Another Song, Then Take Action
Don’t Let Time Pass[i]
Many plan sponsors use “life events” as a trigger to prompt participants to reconsider their benefit elections – marriage, birth, relocation, etc. Why not birthdays? Why not a reminder to workers, regardless of their actual age, on their birthday in 2021? Encourage workers to share with family members – encourage them to close their eyes, make a wish, blow out the candles, read on and take action!
If applicable, register for the draft (selective service). Register to vote.
If/once you are employed, confirm that vesting service started in your employer’s tax-qualified pension or retirement savings plan. Why must vesting service be credited starting at age 18? If you learn nothing else on your 18th birthday, let it be these two rules:
- Rule #1: EVERY PROVISION IN AMERICA’s TAX CODE IS ARBITRARY! They could have said age 17, 2 ½ days!
- Rule #2: BECAUSE IT IS ARBITRARY, CONGRESS CAN CHANGE EVERYTHING, WHENEVER THEY WANT!
If you are eligible, start contributing to your employer-sponsored plans. Remember to name a beneficiary.[iii]
If you are not eligible, or if your employer doesn’t offer a pension or a retirement savings plan, open up an Individual Retirement Account (IRA). Starting at age 18, if you contribute $2,500/year for 10 years to a Roth IRA, invest and earn 8%/year (combination of stocks & bonds), and you’ll have $1,000,000+ tax free at age 70 (Author’s calculation). What will that be worth? No one knows. No one can know. However, today, they say that 3% of American households have $1MM in assets. So, even if that percentage triples over the next 52 years (52 years, ugh!), you’ll still be among the 10% most wealthy Americans[iv]. You never know, you just might live past your 100th birthday.[v] Regardless of how long you live, remember to name a beneficiary and update that designation as necessary (you may outlive everyone you know today)!
Possibly, you’ll never be as healthy as you are today. So, ask your employer about a HSA (Health Savings Account). Enroll, contribute, invest, build the HSA account, … because someday, you (or members of your immediate family) will likely need assets to cover out of pocket medical, dental, vision, hearing and long-term care expenses. Name a beneficiary – just in case you don’t spend it all yourself. The 2021 HSA contribution maximum is $3,600 if you are enrolled in single coverage, $7,200 if you are enrolled in non-single coverage. And if you are emancipated (look that up if you need to) from your parents, but still covered under their HSA-capable health plan, you may be able to contribute up to $7,200 to your own HSA account (in addition to your parents who contribute to their account).
Oh yeah. Don’t forget. A median worker (the middle person, half more, half less) has completed less than five years of service with their employer – that hasn’t changed for the last five decades and may not in the future. So, expect to have 10, 12, 15 or more employers. The time to prepare, to set expectations, is now, today.
Have a beer or a glass of wine. Celebrate. Tax code provisions require your eligibility in your employer’s 401k (some plans may require you also complete a year of service). Contribute when first eligible because many plans have vesting provisions – as your period of participation increases, you often own a larger percentage of the employer contribution (and earnings thereon). So, when (not if) you leave that employer, you can take some/all of the employer contributions (and earnings thereon) with you. If you expect your wage rate to increase, ask your employer about Roth. Generally speaking, because of the federal government deficits and debts generated by your parents and grandparents (and the rest of us, too), federal and state income tax rates are likely to increase in the future – so your current marginal tax rate (look that up if you need to) may be the lowest you will ever see.
Trust but verify. Don’t trust decisions you made years ago when your brain wasn’t fully developed. It is time for you to check on your progress. Go back and re-read ages 18 and 21 above. Update those beneficiary designations. Probably time for a will and a durable power of attorney for health care. What are you waiting for?
It’s not too late[ix]. Some say life begins at 40. Go back, re-read ages 18, 21, and 30. And, oh yeah, life is not a dress rehearsal for retirement. If you haven’t already, start doing those things you always dreamed of doing.[x]
Ketchup, Catsup, “Catch-up” … whatever. The year you turn age 50, you can try to make up for lost time (but there is nothing like early savings, compound interest, the time value of money, see age 18, above). Check with your employer. If they don’t offer a retirement savings plan, it’s time they start. If they do offer a plan, but not “catch-up” contributions, it’s time they changed. And, if they do offer a plan with “catch-up”, it is time for you to ramp up your savings. The 2021 “catch-up” maximum for your employer-sponsored retirement savings plan is generally $6,500 – either on a pre-tax or a Roth basis (in addition to the $19,500 regular contribution maximum).
Don’t forget, if you have wages, you are also eligible to contribute to an IRA. And, yes, IRAs also have “catch-up” contributions! The maximum contribution for IRAs is $6,000 in 2021, plus “catch-up” of another $1,000.
So, most middle-class Americans who are age 50+ and eligible for an employer-sponsored plan can contribute $33,000 in 2021 ($26,000 + $7,000) – and all of that can sometimes be contributed on a Roth basis. That would be one big hole in your after-tax take home pay!
More Ketchup, Catsup, “Catch-up” … whatever! This time, HSAs. Individuals age 55+ who are eligible to contribute to a HSA can contribute “catch-up” – here $1,000 (in addition to regular contribution maximums of $3,600 (single), $7,200 (non-single)). Why do HSAs & 401ks have different “catch-up” eligibility ages? No one knows (see Rule #1, above). Contact Congress to pursue a change to age 50, same as the 401k (see Rule #2, above)
It’s too early to take money out of your 401k, but the 10% early withdrawal penalty tax may not apply to distributions made “after separation from service after attainment of age 55”.
Age 59½ is the milestone when most retirement accounts can be accessed for any reason without the 10% early withdrawal tax penalty – including IRAs, 401(k)s, 403(b)s, profit sharing plans, other qualified plans, and non-qualified tax-deferred annuities. Most 401(k), 403(b), and profit-sharing plans allow for an in-service non-hardship withdrawal at age 59½. Your plan may but need not allow for in-service distributions at this age.
Some take distributions and roll assets over to an IRA in a search for better investments. Others will leave the assets in the employer-sponsored plan because it offers “liquidity without taxation or leakage” via plan loans. Your employer-sponsored plan may also offer ERISA fiduciary protections, and many times, protection from creditors in bankruptcy.
Why 59 ½, why not 60 or something else? Did you forget the #1 Rule?
A surviving spouse who did not remarry can collect Social Security surviving spouse benefits on a reduced basis. Commencing this benefit may not impact the surviving spouse’s own individual benefit – she/he can switch to their own benefit at a later date if higher. Benefits collected prior to the Full Retirement Age (FRA), soon to be age 67 for everyone who isn’t already age 67, are subject to these earnings limits in 2021:
- For years prior to reaching FRA, $18,960 – benefits reduced $1 for every $2 earned over $18,960.
- For individuals who reach FRA in 2021, $50,520 – benefits reduced $1 for every $3 earned over $50,520 until the month the worker reaches her FRA.
Individuals who qualify can commence a reduced social security income benefit at age 62. The reduction varies based on your Social Security Full Retirement Age. Again, the above earnings limits apply until an individual reaches her FRA.
Individuals who qualify can commence Medicare coverage at age 65. If you have commenced Social Security income benefits, Medicare Part A coverage may be automatic. Once any part of Medicare commences, you are no longer eligible to contribute to your own HSA. However, if you are covered under Medicare but your spouse is not, and your spouse has enrolled in non-single HSA-capable coverage, he/she can contribute the full non-single maximum amount to the HSA.
Depending on the number of workers employed at your organization, separate rules may apply if you continue employment past age 65 and maintain employer-sponsored coverage.
Back in 1983, President Reagan signed into law the Social Security Amendments Act of 1983. Until then, Social Security’s FRA for commencing unreduced benefits was age 65. The 25-year phase in started 20 years later, in 2003, leaving everyone born before 1938 unaffected. Age 67 applies to everyone born in 1960 or later. That’s a 45-year transition period from approval until full implementation. A spouse’s benefit is 50% of the worker’s benefit if the spouse commences at his/her FRA.
Keep in mind that a worker can improve the dollar amount of Social Security benefits by delaying commencement to a date after FRA. Benefits increase 8% per year, prorated monthly, for delayed commencement up to age 70. Caution: The spouse’s benefit is not improved if the worker or the spouse delays commencement of benefits past FRA.
And, oh yes, neither Social Security nor Medicare Part A (Hospital Insurance) Trust funds are well funded. Just as important, the other Medicare coverage provisions, Part B (physician, etc.) and Part D (Rx) are funded primarily with general revenues. So, expect to see some changes in employment and income taxes to fund these programs.
If you haven’t already started Social Security income benefits, now’s the time. Benefits do not increase by delaying commencement beyond age 70.
Required minimum distributions must commence no later than April 1st of the calendar year following the calendar year you reach age 72. However, there are two major exceptions:
- Roth IRA assets are not subject to the required minimum distribution rules (Roth 401(k) yes, Roth IRA, no). Why? See Rule #1, above.
- The required minimum distribution provisions generally don’t apply to the pension or retirement savings plan where an individual is actively employed unless the individual is a 5% owner of the firm.
We are providing this information to you solely in our capacity as individuals with knowledge and experience in the employee benefits industry and not as legal advice. The issues presented here may have legal implications, and we recommend discussing this matter with your legal counsel prior to choosing a course of action. This article was prepared for informational purposes only. It is not, and you/others should not use it as a substitute for legal, accounting, actuarial, or other professional advice.
IRS CIRCULAR 230 NOTICE: Any statements contained in this document was not intended or written to be used, and cannot be used by the recipient or any other person, for the purpose of avoiding any Internal Revenue Code penalties that may be imposed on such person [or to promote, market or recommend any transaction or subject addressed herein]. Recipients of this document should seek advice based on their particular circumstances from an independent tax advisor.
[iii] Alfred E. Neuman, Mad Magazine. “What me worry?”
[iv] Spectrem. A new survey has found that there are 11.8 million households which have a net worth of $1 million. That is equal to 3% of the United States entire population.
[v] The average life expectancy of a girl born today is 79.6 years—for a boy it is 76.2 years—which means that she and her peers will live to shape the rest of this century. And as the number of regular, semi-super- and supercentenarians has
increased, so too has the maximum lifespan for humans, which has gone from 112 to 122. Some project up to 50% of individuals born in developed countries in 2020 will live to see their 100th birthday.
[vii] President Ronald Reagan, “Trust, but verify”, “Doveryay, no proveryay”, a rhyming Russian proverb, 12/8/87. See also: Jack Weinberg, Free Speech Movement, “Don’t trust anyone over 30”, San Francisco Chronicle, 11/15/64. See also: Billy Joel, A Matter of Trust, Accessed 11/19/20 at: https://www.youtube.com/watch?v=-fGHuwWMZ1w
[viii] John Lennon, Life Begins At 40, Accessed 11/19/20 at: https://www.metrolyrics.com/john-lennon-life-begins-at-40-john-lennon-ml-video-qm6.html Will Rogers, Life Begins at 40 (movie), “At 20, we don’t care what the world thinks of us. At 30, we worry about what it thinks of us. At 40, we’re sure it doesn’t think of us.”
[x] J. Towarnicky, Life is not a dress rehearsal for retirement. Start doing some of those things you are dreaming about today. 9/18/18. Accessed 11/19/20 at: https://www.psca.org/news/blog/life-not-dress-rehearsal-retirement-start-doing-some-those-things-you-are-dreaming-about
[xiii] Revenue Act of 1978, Pub.L. 95–600, 11/6/78.
[xvii] Benton Overstreet and Billy Higgins, There’ll Be Some Changes Made”, 1921, Accessed 11/19/20 at: https://www.youtube.com/watch?v=m15p34pTQ3w Social Security Amendments of 1983, Pub.L. 98–21, 4/20/83.