If you're turning 55 this year, you may be starting to count down toward retirement. And that means it's important to take advantage of the savings opportunities available to you.
It's also important to know the rules regarding retirement plan withdrawals. With that in mind, here are a few important things to keep in mind as your 55th birthday approaches.
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1. You can put extra money into your IRA or 401(k)
Once you turn 50, you become eligible for catch-up contributions in an IRA or 401(k) plan. With the former, you get the option to contribute an additional $1,000. If you have a 401(k) through your employer, your catch-up contribution can total up to $7,500.
If you haven't been taking advantage of catch-up contributions these past few years, now's a good time to start. And don't be fooled by the terminology here. You don't have to be "behind" on retirement savings to be eligible to put in that extra money. You simply need to be 50 or older -- that's it.
2. You can put more money into your HSA
If you're contributing funds to a health savings account (HSA) so you'll have money available for healthcare spending, age 55 is a big deal. That's because it's the earliest age at which you can make catch-up contributions in one of these accounts.
Unlike IRAs and 401(k)s, with an HSA, you have to wait an additional five years to contribute extra money. And your catch-up contribution in one of these accounts maxes out at $1,000. But it's worth sticking extra money into an HSA because there's a good chance you'll need the funds to pay for healthcare once you retire and move to Medicare.
Also, one lesser-known HSA rule is that once you turn 65, you can withdraw funds penalty-free for non-medical expenses. In that scenario, you'll be taxed on your withdrawal, whereas with a medical withdrawal, you won't be. But all told, there's no such thing as overfunding an HSA.
3. You may be able to tap your 401(k) early without a penalty
Generally speaking, withdrawing funds from an IRA or 401(k) before age 59 1/2 results in a 10% penalty. There are limited exceptions, such as taking up to $10,000 out of an IRA to buy a first-time home. Otherwise, the IRS tries to do everything it can to persuade workers not to tap their retirement savings early.
However, there's a potential exception for workers aged 55 or older. If you leave your job during the calendar year you turn 55 or later, you may be able to take money out of your 401(k) before age 59 1/2 without incurring a penalty. This exception applies only to funds taken from a 401(k) that's sponsored by the employer you're separating from. You can't take a withdrawal from an old 401(k) penalty-free in this scenario.
Turning 55 is a pretty big deal in the context of retirement savings and planning. Make sure you know the rules inside and out so you can make the most of the options available to you.
