By Andy Ives, CFP®, AIF®
In most states the legal age for alcohol consumption is 21. And you must actually be 21. When you hand your driver’s license to the bouncer and he shines a little flashlight on your date of birth, it is not good enough to say you will be turning 21 in a couple of months. Unless today is your 21st birthday or later, the bouncer will wave you away, denying access to the premises.
While you must attain the age of 21 to have a legal drink – simply hitting a specific birthday is not always the deciding factor when it comes to allowing (or requiring) certain retirement account transactions. Here we discuss four important ages applicable to IRAs and/or workplace retirement plans like a 401(k). For two of these landmark times, a person must attain a specific age to proceed. In the other two, it is acceptable to be turning the relevant age later that year.
Age 55 Penalty Exception. The age-55 exception is available in the year when a person turns 55. You do not have to actually be 55 to take advantage of this benefit. Note that the age-55 exception applies to workplace plans only. It does not apply to IRAs or IRA-based company plans like a SIMPLE or SEP. If a plan participant separates from service in the year he turns 55 or later, he can take a withdrawal from that specific plan and avoid the 10% early distribution penalty. You cannot separate from service in a year before turning 55 and delay the distribution until the year you turn 55. That will not qualify. Also know that this is a universal IRS exception and not something plans can opt out of.
Age 59 ½ Early Withdrawals. Unless another exception applies, a person must be 59 ½ to access IRA or workplace retirement plan dollars without a 10% early withdrawal penalty. Unlike the age-55 exception, it is not good enough to be turning 59 ½ later that same year. You must actually hit that specific 59 ½ birthday. (Don’t worry about counting the days of the year. Just add six months to your 59th birthdate to see when the exception becomes available to you.)
Age 70 ½ for a QCD. Similar to the age 59 ½ rule, a person must actually be age 70 ½ to be eligible for a QCD (“qualified charitable distribution”). QCDs are only permitted from IRAs. You cannot do a QCD from a workplace plan like a 401(k), and turning 70 ½ later in the year is not sufficient. Also, if you have an inherited (beneficiary) IRA, you still must be 70 ½ to do a QCD. How old the original IRA owner was when he died, or how old he would have been today had he lived, is irrelevant. The 70 ½ age limit for a QCD is a hard-and-fast entry date.
Age 72 for RMDs. Required minimum distributions (RMDs) start in the year a person turns 72. Technically, the first RMD does not need to be taken until the “required beginning date,” which is April 1 of the year after a person turns 72. Regardless, the indicator for beginning RMDs is the year in which a person turns 72. Additionally, an account owner can take his RMD before actually turning 72. (Note that RMDs from a company plan could potentially be delayed if the plan has the still-working exception.)
Recognize that some retirement account exceptions and transactions are available only at a specific age. Others are more general and can be leveraged in the year when a person turns a particular age. Be sure to know what IRA bars and nightclubs you can enter, or else the IRS bouncer could check your I.D., shake his head, and turn you away.