8 Birthdays that Can Impact Your Tax Returns

When it’s your birthday, be grateful but allow yourself to feel important, build new memories and celebrate another year of life. Depending on the number of candles on your birthday cake, you may also receive a gift from Uncle Sam. Whether that gift marks the beginning or end of certain eligibilities or income exclusions, it is important to be aware of these dates.

Here are 8 important tax birthdays that can impact your tax returns.

Source: Academy of Preferred Financial Advisors, APFA, Adlog # 11988123

Age 50

If you are age 50 or older as of the end of the year, you can make an additional catch-up contribution to your 401(k) plan (up to $6,000 for 2017), and Section 403(b) tax deferred annuity plan (up to $6,000 for 2017).

To do this you must first check to see that your plan permits catch-up contributions. You can also make an additional catch-up contribution (up to $1,000) to a traditional IRA or Roth IRA.

Age 55

If you permanently leave your job for any reason after you turn age 55, you can receive distributions from your former employer’s qualified retirement plans without being socked with a 10% premature withdrawal penalty tax. This is an exception to the general rule that distributions received before age 59 ½ are hit with a 10% penalty.

Age 59 1/2

You can receive distributions from all types of tax-favored retirement plans and accounts (IRAs, 401(k)s, pensions, and such) and from tax-deferred annuities without being socked with the 10% premature withdrawal tax.

Age 70 1/2

You generally must begin taking annual Required Minimum Distributions (RMD) from your tax-favored retirement accounts (traditional IRAs, SEP accounts, 401(k) accounts, and the like. However, you do not need to take any RMD from your Roth IRA.)

You must calculate your minimum distribution and if you do not take out the minimum distribution, the difference between what you should have taken out and what you actually took out is usually subject to a 50% penalty!

These tax laws are very important because if you choose to ignore the RMD rules there can be dire consequences. Planning for this event is critical and provides a great opportunity to seek the advice of a knowledgeable professional. The IRS can assess a penalty tax equal to 50% of the shortfall between the amount that you should have withdrawn for the year and the amount that you actually took out.

Unfortunately, although these rules seem simple, they often are not! For example, your first RMD is for the year you turn 70½. However, you can postpone taking out your first RMD until as late as April 1st of the following year. If you chose that option, however, you must take two RMDs in that following year (one by April 1st, which is for the previous year) plus another by Dec. 31st (which is the one for the current year).

There's one more exception. If you're still working after reaching age 70 ½, and you don't own over 5% of the business that employs you, the tax law allows you to postpone taking any required minimum withdrawals from that employer's plans until after you've retired.

Avoid Dire Tax Consequences with Chatterton & Associates

In today’s highly complex and rapidly changing world, investors are faced with an incredible array of investment choices. Many advisors are happy to help you invest your hard-earned dollars, but are not well versed in certain critical areas or do not have access to other professionals that may coordinate those areas for them.

At Chatterton & Associates, our team of financial advisors collaborate with tax planners and wealth managers to provide our clients with comprehensive investment services. In our initial evaluation, we will create a structured financial plan based on your short- and long-term goals, cash flow, risk tolerance, and more.