Retirement is part of the American Dream. It’s one of the reasons why we toil so long and hard each day to make ends meet and set aside a nice nest egg for the future that will surely one day come. Along the way, make sure you avoid getting hit by these following retirement penalties, so you can best plan for your golden years.
Medicare late enrollment penalties: You can first sign up for Medicare Part B within seven months of your 65th birthday. But if you fail to enroll during this crucial period, you face a penalty of a premium increase by 10% for each 12-month period that you were eligible but did not enroll. The premiums won’t ever decrease, either. If you are still working once you become eligible, as long as you sign up within eight months of leaving your job, you can avoid retirement penalties.
Penalty for failing to take retirement distributions: Once you turn 70 ½, you are required to take withdrawals from your 401(k)s and IRAs. You can withdraw the necessary amounts from any of your IRAs and can even combine them. But the 401(k) RMDs will need to be withdrawn from each account or you could get penalized. If you fail to do this, you could face as much as a 50% tax penalty on the offending 401(k) accounts.
401(k) early withdrawal penalty: If you withdraw your 401(k) too early, there’s a penalty for that, too. That penalty is removed once you reach age 59 ½. But for public safety employees or those who leave their job at age 55 or older, there penalty-free withdrawals that you can make. If you have loans that have been taken out, and you leave your job or lose it, the loan often becomes due right away; and if you are unable to pay it back, a penalty may also apply.
IRA early withdrawal penalty: For IRAs, if you leave your job before you reach the age of 59 ½, there is typically a 10% early withdrawal penalty that applies. For instance, if you withdrew $5,000 prior to reaching this qualifying age, you’d generally pay a 10% penalty tax of $500. But you can also avoid these penalties under certain circumstances, like using the money for college or as the down payment on a first time home purchase (a few other situations, like medical expenses, also count as an exclusion from the penalty, too).
Make sure you are smart about your retirement. Always consult with your financial advisor before making any big financial moves. These experienced experts can help you make the smartest decisions with your money so you can avoid common retirement penalties.