Mark Your Calendar for These Birthdays... and the IRS Says 'Oops'
{{#rendered}} {{/rendered}}Dear Readers;
Regardless how you feel about getting older, the alternative is a lot worse!
In our culture, turning twenty or hitting 40 are major milestones. However, other birthdays are much more important in the eyes of the law.
The Financial Planning Association put together a list of what I call "trigger" ages — birthdays that mark significant financial events or changes, often in terms of taxes.
{{#rendered}} {{/rendered}}Here you go:
Age 14 — Before reaching this age, if a child owns investments that generate more than $1,500 in annual income, the excess over this amount is taxed to Mom and Dad. Once junior hits 14, however, this is no longer the case. Investment income (note, not income from a job) above $750 is taxed at the child's tax rate, which is usually lower.
Age 17 — Attention parents! This is the last year you can claim your child as a dependant and take the "child care tax credit" of $600. It's also the last year you can contribute to a child's Education IRA, now called the "Coverdell Education Savings Account (ESA)." One exception: if your child has "special needs" (read: a physical or mental handicap which makes learning more challenging), you are not subject to this cut-off. Remember, the annual contribution to an ESA was increased from $500 to $2,000 as of this year.
{{#rendered}} {{/rendered}}Age 18 — In some states, this is when a child is officially considered an "adult" for financial purposes. This means she can own investments without needing an adult to act as custodian. So legally, he or she gets complete control over any assets which were set aside in a "Uniform Gift to Minors Account" or "Uniform Transfer to Minors Account." Ever see the look on the face of a new 18-year old who suddenly realizes she can do whatever she wants with all that money grandma put aside for her when she was an adorable 2-year-old?
Age 21 — If a state doesn't consider 18 to be the "age of majority, then all of the above happens three years later.
Age 29 — The last year the beneficiary of an ESA can make tax-free withdrawals from the account for educational expenses. It's also the last year that the owner of the account can change the beneficiary to another family member. If there is any money left in the account on the beneficiary's 30th birthday, he or she will owe ordinary income tax plus a 10% penalty on the earnings portion. (Again, this deadline does not pertain to beneficiaries with "special needs.")
{{#rendered}} {{/rendered}}Although your 30's and 40's might be significant from a personal standpoint, there isn't anything of note in terms of the law. However, once you hit the big five-oh, birthdays start to matter again, financially speaking.
Age 50 — Those who celebrate their 50th birthday at any time during 2002 can take advantage of the "catch-up" provisions in the new tax law. This means they can contribute an extra $1,000 to company retirement plan accounts for a total maximum contribution of $12,000. In addition, you can put an extra $500 in your IRA, for a total of $3,500.
Age 55 — If you leave your job and are at least 55 years old, withdrawals from your company retirement plan are no longer subject to a 10% "early withdrawal" penalty. At least, that's what the tax code allows.
{{#rendered}} {{/rendered}}Your retirement plan has the option of being more restrictive and NOT allowing this, so be sure to check your plan rules before you take a distribution! Note that while the 10% penalty may be gone at this age, you can't avoid paying ordinary income tax on any money you withdraw.
Age 59 1/2 — Not exactly a birthday, but an important milestone financially. Six months after you hit age 59, you can take withdrawals from any qualified retirement plans as well as IRAs penalty-free. And you don't have to leave your job to do so. Since annuities are primarily retirement vehicles, the 10% early withdrawal penalty on these accounts also vanishes. (Keep in mind that there might be other penalties, such as a deferred sales charge, but this would be imposed by the insurance company, not the federal government.)
Age 62 — The earliest year you can apply for Social Security benefits. However, don't be too eager to claim them — benefits will be reduced by as much as 20% if you do so. If you decide to go back to work because you realize you can't live on Social Security alone, be careful how much you earn. You'll lose some of your Social Security benefits if you earn more than a certain amount — $10,600 in 2001.
{{#rendered}} {{/rendered}}Also, 62 is the earliest age at which you are eligible for a "reverse mortgage." With this type of arrangement, the bank sends YOU a monthly check based on the equity in your home. Since this doesn't have to be re-paid until you move or die, this is one way to generate extra income in retirement. (The loan is settled using the proceeds from the sale of your home.)
Age 65 — The country's "official" retirement age... for now. It's the age at which you can collect full Social Security benefits, as long as you were born before 1938. Anyone born after this has to wait longer. All Baby Boomers (born from 1946-1964) will have to wait until at least their 66th birthday to collect 100% of their Social Security benefits.Once you reach age 65, you can earn as much as you want without it affecting your Social Security benefits.
Age 70 — The latest age you can start Social Security benefits. Just because you CAN begin benefits earlier doesn't mean you have to, and there are benefits for waiting: you can increase your Social Security check by 3% for each year you postpone the start of benefits. However, you must apply no later than your 70th birthday.
{{#rendered}} {{/rendered}}Age 70 1/2 — Again, not a birthday. In fact, I'd love to hear from anyone who understands the rationale behind these "and-a-half" ages the government has come up with. Why wait until six months after a particular birthday? Why not simply use the birth date itself?
At any rate, by age 70 1/2 you must begin taking a minimum amount of money out of your retirement plans and IRAs each year. But apparently just to complicate things further, you really have until April 15 of the year after you turn 70 1/2 to start withdrawals.
However, if you wait until this deadline, you'll have to take two distributions that year, which could throw you into a higher tax bracket. So while it might feel good to postpone the start of withdrawals, it might not be smart in terms of taxes. Run the numbers or have your tax professional do a rough calculation for you.
{{#rendered}} {{/rendered}}Exception to the "Age 70 1/2 Required Minimum Distribution Rule": if you are still working for the company sponsoring your retirement plan and you don't own 5 per cent of the business, you can postpone withdrawals from that plan until you actually retire.
Happy birthday, whenever it is!
Gail
{{#rendered}} {{/rendered}}Attention Readers: Important Correction! The IRS now says it made a mistake with regard to additional contributions to 529 college savings plans.
Several weeks ago I told you that the annual amount you can give someone without owing any federal gift tax increased from $10,000 to $11,000 this year. Since the tax code allows you to contribute five years worth of annual gifts to a 529 plan in a single year without triggering the gift tax, this means you can put as much as $55,000 into one of these accounts this year on behalf of a child. (Provided you don't give that beneficiary any more gifts for the next four years, you get to subtract $11,000 from your taxable estate, saving a chunk of potential estate taxes.)
But what if you maxed out your contribution last year, when the limit was $50,000 for a 5-year period? Clearly, you could add more to the account this year, but how much?
{{#rendered}} {{/rendered}}Contrary to what I was originally told, the maximum you can add this year without triggering the federal gift tax is $1,000. Since the original contribution is spread out over 5 years ($10,000 per year), the extra $1,000 would bring this year's contribution up to the $11,000 annual limit.
Careful! A number of states have lower gifting limits than the feds, so check before you write the check. My thanks to those who caught this IRS mistake and e-mailed me about it.
Gail
{{#rendered}} {{/rendered}}If you have a question for Gail Buckner and the Your $ Matters column, send them to moneymatters@foxnews.com along with your name and phone number.
The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.