For as long as I can remember, people in the so-called middle and lower classes (as far as income is concerned) have always felt that the “rich” have far too many tax breaks. They point toward those wealthy individuals who are able to retain a significant portion of their income through various income tax deductions and credits (which serve to reduce your taxes).

With the US economy in the toilet for the last few years, these talks of unfair tax breaks for the wealthy have been getting much more prominent.

However, what many people fail to recognize is the fact that many of these same deductions and credits are available to taxpayers of all income levels. Here are a few ways in which you can reduce your taxes, just like the rich!

So let’s look at how to reduce your taxes like the wealthy!

Giving To Charity

Donating money to a charitable organization is one of the most common ways that the wealthy reduce their tax bill. You don’t have to make it on the cover of the next Philanthropy magazine in order to make an impact. Just be sure to receive a receipt for any donations that you make to your local church, or food bank and deduct those amounts from your taxable income. Even if you are just giving to the poor – as long as it’s through a charitable organization – will give you an additional tax deduction!

Also, include any donations which you may have made to disaster relief efforts and other 501(c)(3) organizations (such as foundations connected to educational institutions, medical research, etc). In this case, you are able to reduce your taxes by helping others!

Owning A Home

There are two ways in which you can benefit from “owning” a home.

Take Out A Mortgage

I think it’s becoming a pretty well-known fact that I hate mortgages. However, they do carry tax benefits to them. If you have a mortgage, then you are allowed to deduct both the interest paid against the loan and the property taxes paid during the tax year, from your income. For those of you who have looked at your statements, you know that these amounts can be quite large (especially if you live in New Jersey)!

Own Rental Property

Another way in which the “wealthy” are able to mitigate some of their tax liability is to purchase rental property. All expenses that are incurred in both the improvement/renovation and maintenance of your rental property can be deducted from your income. Don’t forget to include the costs for advertising, property management, legal fees, and even travel related to your rental property!

If you take out a mortgage on your rental property, then you are able to deduct both the interest and property taxes as well, and reduce your taxes even further.

Start A Business

This is probably how the majority of non-celebrity wealthy people established themselves. For most people reading this article, quitting your job to start a business is probably not feasible (it surely isn’t for me)! However, you can easily take a hobby and turn it into a side business.

You can give lessons, offer services, or even create various products, and all without turning your life upside down! You may even want to create a website or start a blog as part of your business.

No matter what you choose to do, any expense related to this business will be tax deductible. With the ability to capitalize certain expenses, starting a business would be a great way to manage your tax situation. If you decide to pay yourself, make sure you are aware of the self employment tax rate.

Invest In Tax-Friendly Accounts

The key here is to get to a point where you can gain a significant portion of your income from income from your investments. Most municipal bonds are exempt from both state and local taxes, and so they are a favorable investment – especially in states that have high tax rates!

If you are looking to save on your tax bill today, then look no further than either a Traditional Individual Retirement Arrangement (IRA), or a 401(k). Both of these accounts allow you to defer your taxes until the time in which you begin to take distributions (up to age 70 1/2). This means that the money you put into these accounts today will not be taxable (up to the limit).

If you desire to gain huge tax savings in the future, you can look into either the Roth IRAs or Roth 401(k)s. What’s special about these accounts is that unlike their “traditional” counterparts discussed above, you pay taxes on the contributions in the year that you make them. However, once you are ready to take your distributions, no taxes are owed.

If you are able to take large enough distributions in order to support yourself, then you will greatly diminish your tax liability.

Take a look at the IRA contribution limits and 401k contribution limits and reduce your taxes!

Nothing Special

As you can see, all of the items listed above can be accomplished by taxpayers of most income levels. You will also notice that these are not earth-shattering, secret financial gems known only to a few!

On the contrary, these are situations that millions of Americans find themselves in every day. The only difference is that many of us don’t realize what a huge difference these overlooked tax deductions can make in our tax liability. If you have not yet completed your tax preparation, then take a look at your finances to see if you are already taking advantage of some of these techniques.

photo by Arvind Balaraman

Reader Questions

1. What situation in your life gives you the largest tax benefit (mortgage, marriage, children, business, retirement accounts, etc)?
2. Do you consider your tax situation before making certain financial decisions?
3. What is the one tax code you would change?

Mutual Funds are no longer an arcane investment tool, but have gained enormous popularity over the past several decades.

As the common investment vehicle used in most employer 401K benefit plans, mutual funds are the investment vehicle of choice by over 80 million Americans, constituting over 50% of available households.

Although the origin of mutual funds can be traced back to the eighteenth century, the modern day version of the fund was given birth in Boston in 1924. From that point on, the concept has grown in acceptability to the point that trillions of dollars are invested in over 10,000 separate offerings managed by both large and boutique fund managers.

The definition of a mutual fund, provided by a trusted Internet authority, is

“An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets.”

For beginning investors, these funds represent an excellent tool for learning the basic principles of investing, including diversification, sector focused investing, and delegated management and related cost structures. They also enable an investor with minimal capital to invest in a variety of opportunities that otherwise would be precluded due to financial constraints.

Fund managers have not ignored product development either. Mutual funds now come in a variety of types to meet every investor’s objectives, from industry specialization and various stock indexes to special situations and emerging market funds.

An investor can pick and choose at will, with minimal restrictions on redemptions, and construct a portfolio that matches his personal perspective on the market. Each fund, on the other hand, manages its portfolio based on the specific objectives detailed in the fund’s prospectus.

Fund manager compensation also varies, depending on the type of fund, its stated tolerance for risk, and the sales structure associated with the distribution of fund units. These costs are important since they reduce whatever return you may earn over time.

As with any other well-developed industry, fund purveyors have learned to disguise their actual fees with complex disclosures and layers of financial information. Care should be taken to understand any fees that apply to operating the fund on a daily basis, as opposed to “loads” that are often collected when units are either bought or sold.

For the past five years, many investors have sought diversification and return in global investment funds that focus on specific regions or developing countries.   Oftentimes, another country’s economy is growing more quickly than your own. You do not need to take a forex course to sort through the complex currency exchange fluctuations. Fund managers employ their own fx brokers to handle exchanges, and units in the funds remain in U.S. Dollars.

One restriction, however, that mutual funds possess is that values are determined on an “end-of-day” basis. All accounting and fee charges are performed daily, and a single unit value is then used for all purchases and redemptions.

Some funds may also delay or restrict redemptions if the assets or securities have low liquidity in the market, as with real estate or micro-cap companies. For this reason alone, exchange-traded funds, or ETFs, have gained in popularity since they offer the flexibility of trading on exchanges like shares are traded for any stock today.

Mutual funds have had a stellar history and benefited many investors. However, as one commentator recently stated, “the growing use of ETFs means the future of mutual funds will be anything but smooth.”

This has been a guest post by Jason Hoerr of Forex Traders.

One of the most popular pieces of financial advice that we hear today is that we need to start saving for retirement. The IRS even gives us the benefit of tax-deferred retirement savings accounts, in order to provide us with an extra incentive to save for retirement.

However, according to a recent article by Market Watch, most Americans are far behind on their retirement savings:

The gap between what Americans need for retirement and the amount they have saved is a staggering $6.6 trillion, Retirement USA, a coalition of workers’ groups, said in a study published Wednesday.

“The retirement income deficit is the gap between the pensions and retirement savings that American households have today and what they should have today to be on track to maintain their living standard in retirement,” said Karen Friedman, executive vice president and policy director of the Pension Rights Center, in a conference call with reporters.

This means that as a nation, we are so far behind when it comes to saving for our golden years, that it almost seems hopeless. These abysmal numbers are due to a number of common mistakes, and the most common one is starting too late.

When to Start Saving For Retirement?

The answer to this question is quite simple…today! With all of the other financial priorities in our lives, why should we put them aside and begin saving for retirement today?

The Power of Compound Interest:

Albert Einstein is known for saying this regarding compound interest:

Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.

Allow me to quote another “genius” (me ) to further explain what compound interest actually is:

Simply stated, compounding interest describes what happens when interest is calculated on a principal amount of money, and then that interest is added to the principal and now interest will be calculated on this new higher amount.

For instance, if you save $10,000 and it earns 10% interest over the course of a year, you have earned $1,000, meaning you now have $11,000 in your account. If we are dealing with compound interest, the next year will begin with a new principal amount of $11,000 and your 10% interest will now earn $1,100 in the second year!

So every year both the principal amount that you invested as well as your earnings from those investments will continue to grow (unless your account loses money). That means that every year you decide to put off saving for retirement, you lose all of the potential growth on your investment as well as the earnings on that growth for the next 20 to 40 years!!

Let’s say that you wish to retire at age 65, but you decide to wait until you are 40 before you begin saving for retirement. Save the current IRA contribution limit of $5,000 each year for the next 25 years and you’ll end up with $365,529.70!!! That is assuming an annual rate of return of 8% (of course your actual return will fluctuate each year, but assuming a steady rate makes it much easier to present an example), and that you deposit the $5,000 as a lump sum at the end of the year.

Now, let’s see what your result would be if you started saving at age 25 – and all other inputs remained the same. If 25 years got us about $365k, then it would be safe to assume that adding another 20 years would get us around $292k. However, starting at age 25 would leave us with $1,295,282.59!!! That’s why it is the 8th wonder of the world!

Take a look at one more example in order to see how important it is to start saving for retirement today:

If you choose to invest $5,000 into your IRA for 10 consecutive years, you would have $72,432.81 (assuming the conditions above). If you choose to not invest another penny, and just allow that amount to grow over the next 30 years, you will end up with $728,867 in your retirement account! That is almost double what you would have if you only give yourself 25 years to invest. Because, in this example, you started early and took advantage of compound interest, you only had to contribute to the account for a total of 10 years to see this result!

If you look at the 401k contribution limits, you’ll see that you can save up to $16,500 for your retirement. Do that for 25 years and you’ll be up to $1.2 million. However if you start early and give yourself 40 years, you will bring your account up to almost $4.3 million!!!

Giving Away Free Money

Most companies that offer 401 (k) plans will also offer a 401k employer match. What this means is that your employer will match the amount that you put into your plan up to a certain percentage of your salary.

The current limit for an employer match is 6% of the employee’s pre-tax salary. That means that if you make $100,000 per year, then by not saving for retirement through your 401k, you are missing out on $6,000 of free money each year!

Of course you also have to consider what your real loss would be once you factor in compound interest. Just that $6,000 each year would bring you over $1.55 million in 40 years!

So not only are you passing up free money, but you are also forfeiting the affect of compounding on that free money!

Even if you do not have another 40 years left until your desired retirement age, it’s not too late to get back on track with your retirement planning!  Maybe consider using the 2011 payroll tax holiday as a chance to save for retirement!

photo by Hygiene Matters

Reader Questions:

1. Do you think you are currently on track with your retirement savings?
2. If you are currently not saving for retirement, what is stopping you?
3. Have you seen the power of compound interest work in your behalf?

Retirement is a fascinating topic don’t you think? 

Millions of people long for it, plan for it and obsess over it.

On a daily basis, people ask themselves questions like these:  when can I retire?; how much money do I need to retire?; and which retirement account should I be saving into as I get ready for that big day?.

The last question is what we want to tackle today – which retirement account is right for you?

We certainly won’t cover every single type of retirement account out there today, but I do want to tackle the big four – 401ks, Traditional IRAs, Non-Deductible IRAs & Roth IRAs to see which one(s) make sense for you.

Let’s take a look:

401k Retirement Account

401k legislation was written in 1978 and finally passed in 1980.  401k’s allow employees to choose to receive deferred compensation rather than direct compensation.  That compensation gets put into a 401k account that is invested.

401ks are tax-deferred retirement savings accounts.  Basically they allow you to reduce your taxable income, which gives you a tax-break now.

They also grow tax-deferred – meaning you are not taxed on the growth of the investments each year.

When you pull the money out in retirement, however, you must pay the Piper!  Uncle Sam will ask for all that deferral to be taxed.

Every dollar you pull out will be included in your taxable income for the year – it’s as if you earned that money. 

401ks – The Right Retirement Account for You?

401k retirement accounts are right for folks who like having an easy way to save for retirement (deductions are taken from your payroll), who want to reduce their taxes now and who are getting an employer match on their 401k contributions.

Traditional Individual Retirement Account (IRA)

A Traditional IRA works much the same way as a 401k except for the payroll deduction.  The limits are much lower in terms of what you can contribute as well.

If you are covered by a retirement plan at work and making between $56,000 and $66,000 for singles and $89,000 and $109,000 for joint-filers then the deductibility of your contributions are phased out.

That means you cannot deduct the entire amount of your contributions from your income. 

If you are making under that amount or you are not covered by an employer retirement plan at all, then you are able to fully deduct your IRA contributions.

Traditional IRAs – The Right Retirement Account for You?

A Traditional IRA is a great retirement account for those who may not have a 401k or other employer plan, or who perhaps do have one, but are making less than the phase-out limits and want to get tax advantages now.

Roth Individual Retirement Account (IRA)

Roth IRAs are Individual Retirement Accounts that do not give you a tax break up front.  Rather, they allow you to put in after-tax money, which then grows tax-deferred.

When you reach 59 1/2, you can take out your contributions and your earnings completely tax-free!

Like the Traditional IRA, the IRS has phase out rules for Roth IRAs.  For single filers, your Roth IRA contributions are phased out when your Modified Adjusted Gross Income (MAGI) is between $105,000 and $120,000.  Above $120,000 you are ineligible for a Roth IRA contribution.

For married filers, the phase-out limits are between $167,000 and $176,000 and above that you are ineligible for contributions.

Roth IRAs – The Right Retirement Account for You?

Who should open a Roth IRA?  Basically anyone who falls under the phase-out limits, wants to diversify themselves from a tax-standpoint and has ran the numbers and feels that income or tax rates will be higher in the future and their potential for tax savings is greater down the road than it is now.

Non-Deductible Individual Retirement Account (IRA)

A Non-Deductible IRA is simply an IRA that you contribute to when you are phased out of your deductiblility.  Remember how we said that if you are covered by an employer plan and make too much money you can’t deduct your contributions? 

A Non-Deductible IRA is the result.

Last year I would never have given the non-deductible IRA a second thought.  It made very little sense to contribute to them. 

This year, however, it may make a lot of sense for folks.  Here’s why:

The income limits for Roth IRA conversions have been lifted, meaning anyone can convert money to a Roth IRA!

I won’t get into the details of this strategy here, since I talked about covnerting non-deductible IRA contributions at length in this post - but quickly, here is the strategy:

Make Non-Deductible IRA contributions (no tax write off); convert those contributions to a Roth IRA (no taxes owed); let your money grow tax-free in the Roth IRA (no taxes owed) and then pull out the money in retirement (no taxes due!)

Non-Deductible IRAs – The Right Retirement Account for You?

This strategy is right for those who make too much money to simply contribute to Roth IRAs, but still want to take advantage of tax diversification by getting money into a Roth.

Which Retirement Account is Right For You?

Readers, let’s hear from you – which is your favorite retirement account and why?

According to Wikipedia, Baby Boomers are those who are born between 1946-1964 – meaning they range in age from 46-64 years of age.

Retirement is certainly on their minds and they are concerned about how much they need for retirement savings.

As baby boomers approach the magical age, there are some pretty important things to keep in mind about saving for retirement.

Let’s take a look at five things to keep in mind about retirement savings:

Retirement Savings Is Up to You!

Ok, so this is no breakthrough – I’m not pretending to discover a cure for cancer by any means, but this point needs to be stressed over and over again.

Years ago, you could work for an employer for 30 or 40 years, retire with a nice pension provided by the company and collect your social security and be pretty comfortable in retirement.

Not anymore!  Companies are dumping their pensions left and right, Social Security will need a massive overhaul to avoid going defunct – so what does that mean for you?

You are on your own for retirement savings – and that’s OK.

When Can You Access Your Retirement Savings?

This is something that all baby boomers should get really familiar with.  Accessing your retirement savings is generally what’s going to provide you an income in retirement, unless you have other business income etc.

Most people recognize 59 1/2 as the magical age to access your retirement savings, but get familiar with the rules surrounding your withdrawals.  Here’s a couple of them to remember:

• You can access your IRA at any time, but be aware of the penalties.
• You can withdraw from your 401k savings prior to 59 1/2 without penalty if you are at least age 55 when you retire.
• You can take out Roth IRA contributions at any point in time, but the earnings must left alone until age 59 1/2.

What is Your Retirement Savings Number?

A few years back, Lee Eisenberg wrote a book called The Number, where he talks about what you’ll need for the rest of your life and what it will cost.  It’s an entertaining and informative look at what the rest of your life will look like.

You should be asking questions like, “Is a million dollars the magical number?”  Many people think they need much, much more than that, but is that right?

In light of this, you’ll need a good retirement calculator and you’ll want to sit down with your loved one and figure out your income versus expenses and determine how much retirement savings you need?

How Will You Diversify Your Retirement Income?

This is one that boomers probably have in the back of their minds, but some careful consideration should be done.

Will you have a pension, social security, 401k savings, IRA money, or annuities to help supplement your retirement income?

What about starting a business or turning a hobby into an opportunity to make some side money?  Have you considered other ways to make money and diversify your income in retirement?  You probably should.

Once again, retirement savings is up to you, therefore you need to be prepared and should have multiple lines in the water so that you’re not relying on the fish always biting from one particular source.

How Will You Diversify Your Retirement Savings From a Tax Standpoint?

Tax diversification is extremely important and is something that everyone should get familiar with and take a look at for their own situation.

In essence, tax diversification takes a look at the tax status of investing into three different vehicles.  You have tax-deferred, taxed-as-you-go (or non-qualified) and tax-free.

No one investment vehicle is right in every circumstance, but I think it’s very important to spread savings out among these three types of accounts because the greater the flexibility you have for accessing retirement savings, the greater the options you have for lowering your tax burden in retirement.  Plus, after reading why tax-deferral may not be all that it’s cracked up to be you might agree with me.

If taxes are high in some years, you have other money to withdraw from besides your 401k.  If tax rates are low, then why not pull money out of your IRA and consider a Roth conversion etc.

How About You?

Readers, what are some other things to consider for retirement?

Who doesn’t want a little extra cash for retirement?  Of course, we all do.  But since money doesn’t grow on trees we have to find a few ways to create our own money tree.

Let’s take a simple look at how easy it could be to grab some extra cash for retirement, but first let’s start with the basics.

401k Contribution Rules

We need to rview the 401k contribution rules so we’re all on the same page.  In 2010, the contribution limit to a 401k is $16,500 if you are under the age of 50.

If you are over the age of 50 you get the opportunity for a $5,500 catch-up contribution so the total you can throw in your 401k is $22,000!

That is a HUGE opportunity for some additional retirement savings!

Extra Money for Retirement Savings

Let’s assume you are age 50 and you want to retire at age 65, so you’ve got 15 years until that magical age of retirement. 

Let’s also assume that you are currently contributing the max to your 401k or $16,500.  You now have an opportunity to throw in an extra $5,500 to your 401k, but you’re just not sure you want to.

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Do the Math!

Let’s just do a simple Time Value of Money (TVM) calculation to give you sense of what the catch-up contribution could net you when it’s all said and done.

Let’s say you’re contributing $16,500 to your 401k – here’s what an extra $5,500 will do

• PMT (payment or contribution) = $5,500
• PV (present value) = $0 – we’ll assume zero for the sake of argument
• Rate (interest rate earned) = 8% – this is fairly moderate – not too aggressive, not too conservative
• N (number of periods) = 15 years – we’ll compound annually
• Solve For FV (future value) = The answer we come up with is $149,336.63!

You are essentially grabbing an extra $150,000 just by doing the catch-up! 

What If I’m Not Age 50?

Okay, for you younger folks who aren’t able to do the “catch-up”, let’s take a look at what a maxed out IRA will look like if you start now!

The IRA contribution limits are currently $5,000 annually for those under the age of 50.  Let’s do some simple math again:

• PMT (payment or contribution) = $5,000
• PV (present value) = $0 – again, we’ll assume zero for the sake of argument
• Rate (interest rate earned) = 8% – this is fairly moderate – not too aggressive, not too conservative
• N (number of periods) = 30 years – we’ll assume your 30 years old and want to retire at age 60!
• Solve For FV (future value) = The answer we come up with is $566,416.06

Not too shabby – more than a half mildo just by maxing out your IRA! 

It’s Not That Simple

Okay, okay, I know that no one earns 8% every single year for 30 years. The problem with these types of calculations is that they are totally unrealistic!  But here’s the point – don’t hesitate to start saving for retirement or any other goal you have.

It Really Is That Simple

Huh?  Yes, it is simple – because the bottom line is that the sooner you get started and the more you can put away – the greater the impact compound interest will have on your portfolio! 

Maybe it won’t be $500,000 or even $150,000 additional savings – but anything is better than nothing!

So, what are you waiting for!? 

Let me know your thoughts

1. Are you maxing out your 401k or IRA?
2. Do you plan on saving additional money this year for your retirement goal?

We all make mistakes – some of them are just more costly than others.

When it comes to our retirement savings there’s a host of mistakes that could cost you.

Because companies are shifting the responsibility of retirement on the employees, it’s vital to correct any of these mistakes as quickly as you can.

1. Bad Methods for Choosing Funds

I’m just not sure which funds to choose so I picked what did well last year

Perhaps you’ve found yourself saying that before.  Picking funds based on past performance is a losing proposition because past performance is no guarantee of future results.

An all-star fund could turn into a dog for a variety of reasons.  Don’t rely only on past performance to make your decisions.  

I didn’t know what to pick so I asked my co-worker what he did.

Bob might be a great guy, but he could be a total goofball when it comes to investing.  Sure, he talks a good game, but your needs and goals are different.  Don’t base your investments on someone else.

I figured I’m aggressive so I just went with a more risky stock fund

It’s OK to be aggressive, but using only one or two funds will typically increase your volatility and expose you to greater risk.  You need to diversify the holdings.

2. Not Diversifying Your Investments

Don’t put all your eggs in one basket. 

Diversification simply means spreading your money over various types of funds and asset classes (i.e. small, mid, and large sized stocks etc.).

The reason you want to diversify is because we don’t know what will go up or down in any given year.  You can take advantage of rising stars and also soften the blow on investments that are stinking it up.

Check out MSN Money’s Asset Allocator tool, which is a good start if you are unsure what type of allocation to use to diversify your account.

3. Not Knowing Your Risk Tolerance

I want to make big returns in my 401k without much risk

Really?  Let me know when you find something like that because I’d like to use that too!

Of course we all want to make good returns without much risk, but those investments don’t exist – if they do, they are typically too good to be true.  (Can you say – Bernie Madoff?)

You need to understand your risk profile and how that impacts your decision-making with your 401k funds.

For guidance in this area, here are five questions to help determine your risk tolerance.

4. Not Paying Attention to Company Match

 Although the recession has led many companies to forego their 401k matching programs, there are still some who offer some sort of match. 

A big mistake often made is not knowing what kind of match the company is offering resulting in leaving free money on the table.

If a company is matching dollar for dollar up to – say five percent, it’s silly to only put in three.  You’re leaving an additional two percent out there that could be matched.

At the very least you should be putting enough into your 401k to take full advantage of any money they are going to give you.

Pay attention to the details of your company’s matching program and by all means take what they are willing to give you!

Reaching retirement is up to you, so make sure you are doing all you can to correct mistakes early so you can reach your goals.

Remember as a kid how excited you were for your birthday to come?  It couldn’t arrive fast enough!  Presents, cake and everyone making a big deal of you was great! 

You probably couldn’t wait to turn 13 and finally become a teenager.  Then maybe you looked forward to 16 so you could get your license.  18 to vote.  At 21 you could legally drink and 25 got you a discount on your auto insurance. 

After that, you may have spent the rest of your time wishing you were 25 again.

It’s in our nature to look forward to milestones.  After all, they are a rite of passage and a big achievement.

Did you know you’ve got some retirement milestones to look forward to?

Being unaware of these milestones will cost you money!

Milestone #1 – Age 50

In 2002, the government changed the rules on contributions to retirement plans and IRA’s.  They allowed a “catch-up” provision for older individuals.  If you are age 50 or older, you may now contribute an extra $1,000 to your IRA’s and an additional $5,500 to your 401k’s in 2009. 

This is a great deal for those looking to sock some extra cash away for retirement!

Milestone #2 – Age 55

Age 55 is a big deal for those looking to retire early for the simple fact that if you retire or separate from service the year you turn 55 or after, you are allowed to take 401k distributions without getting whacked with a 10% penalty! 

Let me say that again…NO PENALTY for early retirement distributions.  This is known as the “Age 55 Exception”. 

Get this – if you roll your money to an IRA, the deal is off the table.  That’s right, you must leave it in the 401k, but you are allowed to take out as much as you want, whenever you want.

Milestone #3 – Age 59 1/2

I doubt most of you celebrate Half Birthdays, but this is one you’ll want to throw a party for!

This is the traditional age in which you can withdraw your retirement money without fear of Uncle Sam hitting you over the head with a 10% penalty for pre-mature distributions.

Milestone #4 – Age 62

62 is a big age as well for the simply because you can now qualify for Social Security benefits.  It doesn’t mean you have to take them or even that you should take them, but you at least have the option available to you.  Don’t forget it will be a reduced benefit, but a benefit nonetheless.

Milestone #5 – Age 65

At this age you are now qualified to take Medicare, which is social insurance including two main parts.  Part A covers hopsitalization and Part B acts as your medical insurance. 

If at this point you are not receiving Social Security benefits then you need to apply for Medicare and will want to do that three months before you turn 65.

Milestone #6 – Age 66-67

If you were born between 1943 and 1954 then your full retirement age (FRA), or the age in which you can collect 100% of your entitled Social Security benefits is age 66. 

For those born in 1955 you have to wait an additional two months.  The government adds two more months to the waiting period for each year until 1960 (i.e. if you were born in 1958, your FRA is age 66 and 6 months). 

If you were born in 1960 or beyond your FRA is age 67. 

I hear a lot of people tell me “I can’t retire until 67″.  What they usually mean is they can’t collect full Social Security benefits until age 67.  You can retire whenever you want, you just won’t get your full benefits until then.

Milestone #7 – Age 70 1/2

Here is another one of those Half Birthdays, however, this one doesn’t justify much celebration.

In the year you turn 70 1/2 good ol’ Uncle Sam says you MUST start pulling money out of your IRA’s or 401k’s. 

What? Surely that’s a typo right?  Sorry to bear bad news, but you MUST start pulling money out of your retirement plans. 

In effect, Uncle Sam says to you, “Great job saving that big chunk of money in your 401k and deferring the taxes for all these years, we love you, now it’s time to pay the Piper, which is why we love you even more at this age!”

What do I mean by MUST?  Well, if you want to try to get around pulling money out and paying taxes on it, just realize that you will be subject to a 50% penalty on your distribution!!  Ouch!

This is known as RMD or Required Minimum Distributions.  There is a special formula based on life expectancy that the IRS uses to determine your RMD.  See these worksheets at the IRS website for more info.

One last note on the 70 1/2 rule.  This only applies to your pre-tax retirement accounts.  In other words, money that you have not previously paid taxes on.  So, your Roth IRAs (which consist of after-tax money) do not apply when discussing RMDs. 

So What.

Now that you know about these important milestones what should you do about it? 

If you are unsure how much you need for retirement and are trying to decide where to save more money you may want to keep the 70 1/2 rule in the back of your mind.

Regardless of age, it makes sense for you to look into whether a Roth IRA is right for you.  You might be able to contribute to them OR you might be able to convert existing pre-tax money to a Roth IRA.

If you are 50 or older that’s easy – you should be socking away as much as you can for your retirement.

If you want to retire early you might be able to take advantage of the age 55 exception and early Social Security Benefits.

Knowledge is key to making the right decisions when it comes to retirement.  Don’t let your birthdays come and go without taking advantage of opportunities that exist for your retirement.

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