As always, two things remain constant: (1) you will get older every day and (2) you will get taxed all along the way. In this article, I’ll explain some key age-related tax and financial planning milestones to remember for you and your loved ones, taking into account changes included in the new Tax Cuts and Jobs Act (TCJA).
Age 0-23: Kiddie tax can bite even harder under the new law
Under the dreaded Kiddie Tax rules, part of a young person’s investment income can be taxed at the federal rates for trusts and estates, which can quickly rise to 37% or 20% for long-term capital gains and dividends (see below). Compare those rates to the 10% or 12% rate that would typically apply to a young single taxpayer’s ordinary income and short-term capital gains, or 0% for a young single taxpayer’s long-term capital gains and dividends, in the absence of the Kiddie Tax rules.
Even worse, the Kiddie Tax can bite younger taxpayers who are no longer really kids — potentially up until the year they turn age 24. However after the year a young person turns age 18, it can only bite if he or she is a student with at least five months of full-time school attendance during the year.
For 2018, the Kiddie Tax can only bite investment income in excess of the threshold amount of $2,100 (the threshold is adjusted for inflation every few years). Investment income below the threshold is taxed at the young person’s lower rates.
Before the TCJA, the Kiddie Tax was charged at the marginal federal income tax rate of the parent(s), which would usually be lower than the trust and estate tax rates that apply for 2018-2025. So the new law can make the Kiddie Tax more expensive for young folks with significant investment income.
2018 trust and estate rate brackets for ordinary income
10% tax bracket $0-2,550
Beginning of 24% bracket $2,551
Beginning of 35% bracket $9,151
Beginning of 37% bracket $12,501
2018 trust and estate rate brackets for LTCGs and qualified dividends
0% tax bracket $0-2,600
Beginning of 15% bracket $2,601
Beginning of 20% bracket $12,701
Age 18 or 21: Custodial account reverts to child’s control
If you’ve set up a custodial account for a minor child, be aware that it will come under the child’s legal control when the kid reaches the age of majority under applicable state law (usually 18 or 21). That means the child can drain what was supposed to be a college account to buy a sports car, tattoos, and body piercings. Not good! For more on the ins and outs of custodial accounts, see this.
Age 50: Extra retirement account contributions allowed
For 2018, folks who are 50 and older as of year-end can make additional catch-up contributions of up to $6,000 to 401(k) plans, Section 403(b) tax deferred annuity plans, and governmental Section 457 plans. You can contribute up to an extra $3,000 to a SIMPLE-IRA plan.
You can also make an additional catch-up contribution of up to $1,000 to a traditional IRA or Roth IRA. In fact, you have until 4/15/19 to make an IRA extra contribution for the 2018 tax year if you will be age 50 or older as of 12/31/18.
As I explained in an earlier column, these extra catch-up contributions can add up to big bucks by the time you are ready to retire.
Age 55 and 59½: Penalty-free retirement account withdrawals allowed
After age 55, you can receive penalty-free payouts from your former employer’s qualified retirement plan(s) without getting hit with the 10% early withdrawal penalty tax that usually applies to payouts received before age 59½. To qualify for this penalty exception, you must have permanently left your job (it doesn’t matter why).
After reaching 59½, you can receive penalty-free payouts from any plan (including one run by your current employer if it allows them) and from your IRAs.
Beware: These penalty-free payouts still count as taxable income, except to the extent of any nondeductible contributions you made to the account in question. The good news is you will probably owe less tax for 2018-2025, thanks to the TCJA.
Age 62: Start date for reduced social security benefits
You can start receiving Social Security benefits at age 62, but they will be lower than if you wait until you hit the current full-retirement age of 66 (for those born between 1943 and 1954). If you work before reaching age 66, your benefits will be further reduced if your 2018 earnings exceed $17,040. Beware: depending on your income from other sources, up to 85% of your benefits may be hit with federal income tax, and you may owe state income tax too. For more on Social Security-related tax issues, see this. Unfortunately, the new tax law did nothing to address any of these issue.
Age 65: State date for Medicare eligibility
If you are among the many who’ve been hammered by Obamacare premium increases, turning age 65 could be a blessing. You are now eligible for Medicare and can probably greatly reduce your health insurance costs, even after paying extra for Medicare supplemental coverage.
Age 66: Start date for full Social Security benefits
If you were born between 1943 and 1954, you become entitled to full Social Security benefits at age 66. You won’t lose any benefits if you work in years after the year you turn 66. However if you turn 66 in 2018, your 2018 benefits will be reduced if your 2018 earnings from working exceed $45,360. As mentioned earlier, up to 85% of your benefits may be subject to federal income tax, and you may owe state income tax too.
Age 70: State date for enhanced Social Security benefits
You can defer Social Security benefits until after reaching age 70, and your benefit payments will be higher than if you start earlier. If you make this choice, you don’t have worry about reduced payments if you continue working, but this option only makes sense for those in good health. Once again, up to 85% of your benefits may be subject to federal income tax, and you may owe state income tax too. The good news is you will probably owe less tax for 2018-2025, thanks to the TCJA.
Age 70½: Retirement account mandatory withdrawal rules kick in
You must start taking annual required minimum withdrawals from your tax-favored retirement accounts (traditional IRAs, 401(k) accounts, and the like) and pay the resulting income taxes after reaching 70½. (You’re not required to take any withdrawals from any Roth IRAs set up in your name.)
Please don’t think you can simply ignore the required withdrawal rules without dire consequences. The IRS can assess a penalty tax equal to 50% of the shortfall between the amount you should have withdrawn for the year and the amount you actually withdraw (if anything). That’s one of the harshest penalties in our beloved Internal Revenue Code.
The initial required withdrawal is for the year you turn 70½, but you can postpone taking that first one until as late as April 1 of the following year. The downside of choosing this option is that you must take two required withdrawals in that following year and pay the resulting double tax hit. For example, if you turn 70½ this year and do not take your initial required withdrawal this year, you face a 4/1/19 deadline for taking that initial withdrawal (that one is actually for the 2018 tax year). Then you must take another required withdrawal (for the 2018 tax year) by no later than 12/31/18. For each subsequent year, you must take an annual required withdrawal by December 31.
Exception: If you continue working after age 70½, and you don’t own over 5% of the business that employs you, you can put off taking any required withdrawals from that employer’s plan(s) for as long as you keep working. For more on the required minimum withdrawal rules, see this.
The required minimum withdrawal rules exist only to allow the federal government to confiscate its share of your retirement account wealth sooner rather than later. Unfortunately, the TCJA did nothing to change that.
