There's a sweet spot in retirement age in which you can make changes to your savings unfettered by IRS restrictions. Image: Khongtham/Shutterstock.com
By: John Grobe, Federal Career ExpertsWow, I really connected on that one! Some of us might occasionally utter this phrase as we watch our drive (golf), serve (tennis) or hit (baseball) go just as far and just as precisely as we had planned.
The phrase “sweet spot” is widely in use beyond sports to mean optimal. An investor may hope that the market has reached its sweet spot, where prices are high enough to encourage those who want to sell but still low enough to promise a good return for the buyer.
There are even sweet spots in retirement planning. Sometimes the retirement sweet spot happens while you are still working. You have hit a point in your career and financial life where you can afford to set more money aside for retirement, but you still have many years of (you hope) growth to look forward to before you will have to start withdrawing from your retirement accounts. This is when you sock as much as you can aside and rely on market forces to put you in a good position later. This spot may occur between the ages of 45 or 50 and the time you need to withdraw your retirement savings (likely between 57 and 65).
But there’s another sweet spot, perhaps after you retire, in which you can make changes to your retirement savings unfettered by IRS restrictions. Once you hit the age of 59 ½ you are free from the early withdrawal penalty on all retirement savings. In fact, if you separate from federal service in the year in which you reach 55 or later (50 for special category employees and even earlier for retired public safety officers), you are exempt from the 10% early withdrawal on money you take from your TSP at that time. If you still work beyond those ages and are still working when you hit 59 ½, you will be able to take penalty free “in-service withdrawals” from the Thrift Savings Plan. Regarding IRAs, 59 ½ is the age of exemption from the early withdrawal penalty whether you are working or not. This sweet spot continues until you reach the age of 73 and have to begin taking required minimum distributions.
What can you do in this sweet spot? You can move and reallocate retirement savings without incurring any tax penalties. If you want to convert money from a traditional IRA to a Roth IRA, you can do so. You will still have to pay tax on the money that was converted, but you won’t have to kick in an extra 10% as a penalty. You might want to convert in order to ensure that you had sources of tax free income in retirement. When converting, you simply have to pay attention to your tax bracket in the year you convert so that you don’t end up moving up into a higher tax bracket or trigger one of the “stealth taxes” like higher Medicare Part B premiums. Of course, if you are under age 65 at the time of the conversion, you don’t have to worry about Medicare premiums because you are not yet eligible for Medicare.
Once you hit 73, you will be required to start taking distributions from all retirement accounts except Roth IRAs, so you want to move as much as you reasonably can into Roths before that time.
When you hit the sweet spot – take advantage of it. If you’re still short of the sweet spot, set aside as much as you can in your TSP and other tax advantaged retirement accounts.
Did you know that 9 times since 1961 the federal reserve has embarked on a series of interest rate increases to fight inflation? And that in 8 of these instances a recession followed?
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