Eligibility for retirement benefits begins at different ages. Your age also plays a role in what you need to do to avoid retirement account penalties. Here are important ages to factor into your retirement plans:
Age 21. Employees can generally first join a 401(k) plan at age 21. Plan sponsors are allowed to exclude employees younger than 21 from 401(k) plans, and many companies do. A recent IRS survey of 1,200 401(k) plan sponsors found that 64 percent require employees to be at least 21 before they can participate in the 401(k) plan. And 61 percent of companies that offer a 401(k) match require employees to be at least age 21 to qualify. "If you can start saving this early, it can make a tremendous difference because you have the growth in your investments accumulating for more years," says Joe Tomlinson, a certified financial planner and founder of Tomlinson Financial Planning in Greenville, Maine.
Age 50. Beginning at age 50, you can defer paying income tax on more of your retirement savings in a 401(k) or IRA. The contribution limit for 401(k)s, 403(b)s, and the federal government's Thrift Savings Plan is $22,500 for people age 50 and older in 2012, $5,500 more than younger people can deposit in these accounts. Older workers can also tuck away $1,000 more than their younger counterparts in a traditional or Roth IRA.
Age 55. Retirees who leave their job during the calendar year that they turn 55 or later can take 401(k), but not IRA, withdrawals without having to pay the 10 percent early withdrawal penalty. Qualified public safety retirees can begin penalty-free withdrawals if they separate from service the year they turn 50 or later. "If you separate from your employer at 55 or later, you can take a lump-sum payment from your 401(k) and there is no penalty," says Erin Botsford, CEO of The Botsford Group in Frisco, Texas, and author of The Big Retirement Risk: Running Out of Money Before You Run Out of Time. "But you cannot roll that 401(k) into an IRA and take a lump sum out without penalty."
Age 59½. The 10 percent early withdrawal penalty on IRA withdrawals ends at age 59½. However, you are not required to take distributions until after you reach age 70½.
Age 62. Workers become eligible to sign up for Social Security benefits at age 62. However, your payout will be reduced if you begin payments at this age. For example, a baby boomer born in 1950 who signs up at age 62 will get 25 percent less per month that he would have gotten if he had waited until age 66 to claim. A worker eligible for a $1,000 monthly benefit at age 66 would get just $750 monthly at age 62. Also, people this age who work and receive Social Security benefits at the same time could have their payments temporarily withheld if they earn above certain annual limits.
Age 65. Medicare eligibility begins at age 65. The initial enrollment period starts three months before the month you reach age 65 and ends three months after your birthday. It's a good idea to sign up right away because Medicare Part B premiums will increase by 10 percent for each 12-month period you were eligible for benefits but did not enroll. If you or your spouse is covered by a group health plan based on your current employment, you should sign up within eight months of leaving the job or health plan to avoid the higher premiums.