Why Turning 59.5 is an Important Milestone for Retirement
Thinking about retiring before 65 and need health coverage until Medicare? Tim breaks down how Affordable Care Act (ACA) premiums are based on taxable income (not assets) and why coordinating Roth vs. traditional IRA withdrawals between age 59½ and 65 can dramatically reduce monthly healthcare costs.
If you are close to reaching age 59½, give or take a year or so, and you haven’t done any financial or retirement planning, now is the time to start. Turning 59½ is likely critical for your retirement accounts, and therefore your retirement in general.
Many people don’t fully understand their planning opportunities when they reach age 59½. Most recognize this as when early withdrawal penalties no longer apply, but the real significance goes much further. This age opens up planning opportunities that can significantly impact your financial future.
Now, I was thinking about this, and, as Americans, we only have a few age milestones to look forward:
- First, when we turn 16, we can get our driver’s license and maybe get our first real dose of independence.
- Then, we turn 18 and have a say in our elections.
- Then we turn 21 and can legally imbibe.
- Then maybe we get a little bit of an insurance discount when we turn 25.
It’s really pretty mundane stuff until we reach age 59½, and this is the age, if you haven’t already done so, you really need to start thinking about your retirement options and planning.
Yes, the 10% early withdrawal penalty ends at age 59½, which gives you genuine control over your retirement funds for the first time. However, true control means having options, not just access.
The decisions you make, or don’t make, at this stage can permanently influence your financial future. This is when many people make emotional mistakes: some overspend simply because they can access funds, while others become paralyzed and do nothing. Inaction at age 59½ can be harmful depending on your situation.
This milestone is a great time for a mindset shift. This is a time when you not only need to think about building wealth, but also how you’re going to create a sustainable income stream without getting hosed in taxes.
Unfortunately, many delay this transition opportunity, and it costs them with limited risk adjusted investment returns and in higher taxes in one form or another, whether from ordinary income taxes or paying more taxes on Social Security, Medicare, or all of the above.
Five Strategic Opportunities at Age 59½
1. In-service rollovers
Once you reach age 59½, employer plans let you transfer 401(k), or 403(b), or any tax-deferred retirement funds into an IRA while continuing to work and contribute. Yes, you can roll what money you have in the 401(k) into an IRA and continue to contribute to your 401(k). But the bulk of the assets can be moved and then you can sweep the rest over later when you fully retire.
Moving the money to an IRA will provide much broader investment selections (most company retirement accounts only have around 20 options), and provide much greater flexibility, and likely allow you to dial in your risk profile.
This restructuring of your portfolio, and preparing for retirement income before you actually stop working, can also provide quick action, in the event of an unexpected job loss that could force early retirement. We’ve seen this happen quite a few times. This isn’t about spending money; it’s about structuring your assets to give you more control over your future.
2. Roth conversions
If you execute Roth conversions before age 59½, withholding taxes directly from a Roth conversion will trigger penalties. But after age 59.5, you can convert and withhold taxes without penalties.
If you can pay the taxes outside of your retirement accounts, you should always do that, because you can’t get that outside money into the tax-free growth of a Roth IRA. For a Roth IRA to be qualified, make sure you get money into a Roth IRA to start the 5-year rule so you can receive the earnings tax free.
3. Lowering future RMDs and Medicare premiums
Small Roth conversions now could potentially lower future required minimum distributions (RMDs), which will help keep you out of higher tax brackets down the road, thus lowering lifetimes tax liabilities, often by quite a bit if you have over 7 figures in your tax-deferred accounts.
This will more than likely help reduce Medicare premiums (or IRMAA surcharges) because these Medicare premiums are based on your adjusted gross income (AGI) and any tax-deferred money, whether it’s in a 401(k) or an IRA, etc., is going to be ordinary income at some point in the future and will, therefore, create ordinary income taxes at some point.
4. Social Security coordination
You can't claim Social Security benefits at age 59½, but your actions between ages 59.5 and 70 can significantly affect both benefit amounts and future taxation. Strategic withdrawals, conversions, and investment decisions now can create a more efficient and optimal Social Security outcome later.
Small Roth conversions before you activate your Social Security benefit could potentially reduce how much of your Social Security becomes taxable, but the provisional income formula that determines this is pretty low, so this might not be a huge benefit.
The main point is to consider when and how you will need to establish income from retirement accounts to help you plan for the future and determine your optimal claiming age.
The goal isn’t to convert everything; the goal is to create more options and give you more control and flexibility over your investments and lifetime tax liabilities.
5. Healthcare strategy before Medicare kicks in at 65
We’ve already covered why 59½ is a great time to start retirement income and tax planning to mitigate higher Medicare premiums down the road. However, sometimes people want to retire before age 65 and they need healthcare coverage until they are eligible for Medicare.
At age 59½, the penalty-free withdrawals give you more ways to manage taxable income, and taxable income determines how much you pay, if you rely on the Affordable Care Act (ACA) marketplace before you can get Medicare.
ACA premiums are based on your taxable income, not your assets. Since Roth withdrawals do not count as taxable income, and traditional IRA withdrawals do, managing these correctly can significantly affect your monthly premiums.
For some retirees, coordinating withdrawals across account types can reduce premiums from several thousand dollars each month to just a few hundred. This planning alone can extend the life of your assets.
What This Means for You
At age 59½, you reach a planning window that can shape the next 3-4 decades of your financial life. If you’ve been working and throwing money into a retirement plan at your employer, or, as we often see, various retirement plans, it’s time to get up and get planning.
You need to focus on making informed/deliberate decisions that build upon each other over time and lead to optimized investments and lower taxes in retirement.
This is exactly what my firm does, so if you’d like to see how we can optimize and help improve your retirement, check out Our Process, schedule a call, and let’s have a quick chat.
A CERTIFIED financial planner™ professional can help you plan for your retirement. Schedule a call today so we can talk about your situation.