Jeremy Springer

Jan 6, 20236 min read

Ready to Retire? Now What?!

We all dream of the day we get to retire. Whether you're ready for more time with grandkids, trips to exotic locations, or getting back to your hobbies, knowing how to be financially ready for retirement starts now.

Saving for Retirement

Traditional IRA

A traditional IRA is any IRA that is not a Roth IRA or a SIMPLE IRA. You can set up a traditional IRA if you receive taxable compensation during the year. You can have a traditional IRA even if covered by an employer-sponsored retirement plan. However, the deductible amount of contributions to a traditional IRA may be phased out.

Contribution Limits. The IRS sets contribution limits for IRA plans each year. It is important to know what your contribution limit is each year so you don't try to put too much into your IRA. Contributing too much can actually result in tax penalties.
Spousal IRA. If both spouses have compensation, each can set up a separate IRA. Spouses cannot participate in the same IRA. If Married Filing Jointly, and one spouse’s compensation is less than the contribution limit, the lower-income spouse can use the compensation of the other spouse to qualify.
SEP IRA. A SEP is a traditional IRA with different per year contribution limits. An employer (or self-employed individual) makes deductible contributions to a traditional IRA on behalf of the employee (or self-employed individual). Distributions are generally subject to the same rules that apply to traditional IRAs.

Penalties apply when IRA funds are used in prohibited transactions. A prohibited transaction is any improper use of traditional IRA funds by the participant, the beneficiary, or a disqualified person. The following are examples of prohibited

transactions.

Borrowing money from an IRA.
Selling property to an IRA.
Receiving unreasonable compensation for managing an IRA.
Using an IRA as security for a loan.
Buying property for personal use (present or future) with IRA funds.
Investing in collectables.

Roth IRA

A Roth IRA is subject to the same rules as a traditional IRA except for the following.

Contributions are nondeductible. Thus, your participation in an employer plan is irrelevant.
If certain requirements are satisfied, distributions are tax free.
The required minimum distribution rules do not apply.
Distributions are not required until your death.
Contributions phase out (become limited) based on your income. Make sure to talk with your investment advisor or tax pro so you don't contribute more than is allowed.
Neither a SEP IRA nor a SIMPLE IRA can be set up as a Roth IRA.

SIMPLE IRAs

A SIMPLE IRS is great for employees at small companies.

Eligible Employers. Employers can set up a SIMPLE IRA for employees if they have 100 or fewer employees who received $5,000 or more in compensation from the employer in the preceding year. The employer cannot maintain another qualified plan (except for certain union employees). The 100-employee limit must be met each year to continue contributing to the plan. A two-year grace period applies once this limit is exceeded.
Eligible Employees. Any employee who received at least $5,000 in compensation from the employer during any two years prior to the current year, and reasonably expects to receive at least $5,000 in compensation during the current year, is eligible to participate in the employer’s SIMPLE plan. The employer can offer the plan on a less restrictive basis but cannot make the plan participation rules any more restrictive.

Defined Contribution Plans

A defined contribution plan is a qualified plan that provides an individual account for each participant in the plan. Benefits depend upon the amount contributed, income, expenses, gains, losses, and forfeitures of other accounts that may be allocated to a participant’s account. Examples of defined contribution plans include profit-sharing plans, money purchase plans, 401(k) plans, and 403(b) plans.

Retirement & Taxable Income

How Social Security Benefits Are Calculated

Social Security retirement benefits are based on the following:

Lifetime earnings.
Age at time of retirement.

Lifetime Earnings

Higher lifetime earnings result in higher benefits. The highest 35 years are used to calculate average monthly earnings. Each year is indexed for inflation to approximate what earnings for that year would be in today’s dollars. Earnings for each year are also capped by the Social Security maximum earnings subject to Social Security tax for that year. After calculating the average indexed monthly earnings, a formula is used to determine the primary insurance amount (PIA).

Full Retirement Age — Social Security

A person reaches full retirement age as follows:

Born prior to 1938........................................................................... Age 65

Born in 1938............................................................ Age 65 and 2 months

Born in 1939.............................................................Age 65 and 4 months

Born in 1940.............................................................Age 65 and 6 months

Born in 1941.............................................................Age 65 and 8 months

Born in 1942.......................................................... Age 65 and 10 months

Born in 1943 through 1954............................................................. Age 66

Born in 1955.............................................................Age 66 and 2 months

Born in 1956.............................................................Age 66 and 4 months

Born in 1957.............................................................Age 66 and 6 months

Born in 1958.............................................................Age 66 and 8 months

Born in 1959.......................................................... Age 66 and 10 months

Born after 1959................................................................................. Age 67

*Birthday on January 1? Individuals born on January 1 of any year should refer to the previous year in this chart.

Age at Time of Retirement

The amount of benefits also depends on the age when you decide to start collecting Social Security. Full retirement age is the age at which retirement benefits equal 100% of

PIA. If benefits begin prior to full retirement age, benefits are permanently reduced. If benefits begin after full retirement age, benefits are permanently increased. By delaying

the age at which you begin to receive Social Security, benefits may increase. It is not beneficial to wait past age 70.

Early Retirement Reduced Benefits

The earliest age a person can begin receiving Social Security benefits is age 62. The following table illustrates the effect on a primary beneficiary’s benefit, and a spouse’s benefit who normally would receive 50% of the primary beneficiary’s primary insurance amount (PIA) when Social Security benefits begin at age 62:

Year of Birth	Primary Reduction Percentage (%)	Spouse's Reduction Percentage (%)
Prior to 1938	20.00	25.00
1938	20.83	25.83
1939	21.67	26.67
1940	22.50	27.50
1941	23.33	28.33
1942	24.17	29.17
1943-1954	25.00	30.00
1955	25.83	30.83
1956	26.67	31.67
1957	27.50	32.50
1958	28.33	33.33
1959	29.17	34.17
After 1959	30.00	35.00

Taxable Social Security Benefits

A portion of your Social Security benefits may be taxable.

Pension Income

Pension income paid to you as a retiree is generally taxable. An employee nearing retirement may be offered a choice in how a pension payment will be made. Pension options from a defined benefit retirement plan generally include a lifetime payment with no survivor benefit, a joint and 50% survivor payment, or a joint and 100% survivor payment. The joint and survivor benefits are reduced amounts from the lifetime payment option. Generally, once a pension option is selected, it cannot be changed.

IRA Distributions

Distributions from IRAs and other retirement plans are generally taxable. Roth IRA distributions are generally not taxable. With some exceptions, distributions taken before

age 59½ are subject to a 10% additional tax.

Required Minimum Distribution (RMD) Rules

Traditional IRAs

If you participate in a traditional IRA you must begin receiving distributions from the IRA by April 1 of the year following the year you turn age 72.

Roth IRAs

The RMD rules do not apply to Roth IRAs. Distributions are required only after your death.

Required Minimum Distribution

By the required beginning date, you must begin receiving periodic distributions from a traditional IRA in annual amounts calculated to distribute the entire interest in the account over your life expectancy or over the joint life expectancies of you and a designated beneficiary. Minimum distributions must be made by December 31 of each year. If you wait until April 1 of the year following the year you turn age 72, you must take two RMDs in that year; the first by April 1, and a second by December 31 of that same year.

Example: Irene turned 72 on August 20, 2022. She plans to take her 2022 RMD in March 2023. She must also take her 2023 RMD by December 31, 2023.

Required Minimum Distribution Calculation

The RMD for each year equals the IRA account balance as of December 31 of the preceding year, divided by the applicable distribution period, or life expectancy, for your age in the current tax year.

Distributions Greater Than RMD

There is no penalty for taking distributions in excess of RMD. A distribution greater than the RMD cannot be carried over and used to meet the RMD for the following year.

RMD Penalty Note

The RMD rules are designed to make sure you distribute most of your retirement benefits during life, rather than passing them to beneficiaries after death. The penalty for taking less than the RMD out of an IRA or qualified retirement plan is 50% of the part of the RMD that was not distributed.

Early Retirement

Early retirees (individuals who retire before age 59½) are allowed to take distributions from retirement plans and avoid the 10% additional tax. If you are an early retiree, you

must follow certain rules.

Distributions must be taken at least annually in substantially equal amounts.
Distribution amounts are determined by your life expectancy.
Distributions must be taken for a minimum of five years beginning with the year of the first distribution. If, at the end of the five years, you have not yet attained the age of 59½, you must continue the distributions until attaining age 59½.

Legal Disclaimer: This post contains general information for taxpayers and should not be relied upon as the only source of authority. Taxpayers should seek professional tax advice for more information. This information was current at time of posting; we are not responsible for updating this or any blog post/article for subsequent changes in the law or its interpretation.