Retirement Planning? What to Do Before Age 65
Several important retirement planning options either begin, change, or disappear around the age 65, and not being aware of them can mean higher healthcare costs, lost tax advantages, or missed opportunities that can affect your financial picture long after retirement begins.
Here are four important retirement planning options to review before age 65.
- Super Catch-Up 401(k) Contributions: A Limited-Time Opportunity
Along with traditional contributions, the current rules allow individuals age 50 and older to make additional catch-up contributions of up to $8,000 to retirement plans each year. However, for individuals ages 60–63, recent rule changes allow for a “super catch-up” contribution of up to $11,250 each year.
These additional allowed amounts create valuable opportunities to boost retirement savings.
Planning question: Will you maximize your retirement contributions during these years?
- Medicare Enrollment: Missing It Can Be Expensive
Turning 65 triggers one of the most important retirement deadlines: Medicare enrollment.
Medicare is a federal health insurance program designed primarily for individuals aged 65 and older. So, whether you need the coverage immediately or not, failure to enroll within the proscribed window may increase your healthcare costs in the future.
While decisions around Medicare can be complicated, especially if you plan to work past 65 or you already have insurance coverage, it’s important to be aware of, investigate, and understand the process because delaying enrollment may result in a permanent premium increase of 10% for each full year of non-enrollment. And, unlike many penalties that disappear over time, this one may follow you indefinitely. So, ask for help if you have questions about Medicare or Medicare enrollment.
Planning question: Will you review Medicare and evaluate enrollment timing implications before age 65?
- HSA Contributions: Stop When Medicare Starts
Health Savings Accounts (HSAs) are tax-efficient savings tools. Contributions can be tax-deductible, growth can be tax-deferred, and qualified withdrawals can be tax-free.
However, once you begin Medicare, IRS rules require you to stop all HSA contributions.
To avoid unintended excess contributions to your HSA and triggering tax penalties of up to 6%, consider stopping HSA contributions six months prior to enrolling in Medicare.
Planning question: Will you coordinate your HSA strategy with your Medicare timeline?
- Medicare Premiums: What is IRMAA?
To determine premiums, Medicare looks back at your income from the previous two years on an annual basis. In other words, financial decisions you make at ages 63 and 64 are used to determine your Medicare premium costs at 65 and 66.
Higher-income retirees may pay additional surcharges called Income-Related Monthly Adjustment Amounts (IRMAA). Be aware that large Roth conversions or retirement account distributions, significant capital gains, or unusual income events that add to your income could result in increased Medicare premiums. Reference Basics of Roth IRA Conversion resource.
This does not mean you should avoid these strategies. It simply means that you should understand how using them may impact your healthcare costs at a later date.
Planning question: Will you look ahead at how today’s income decisions may affect future Medicare costs?
Here is a helpful resource to get a handle on Spending in Retirement.
The Bottom Line
As you move closer to age 65, you have a number of important options that can save money, reduce taxes, and improve long-term outcomes – some options come with expiration dates, while others help you plan to avoid possible negative consequences. Retirement planning isn’t just about building assets. It’s also about understanding the timing of key deadlines, so you can make informed decisions for your financial future.
