Let's walk through the key age-related tax rules that could impact you and your family members throughout your lives.
The kiddie tax might sound cute, but it's a serious consideration for families with young investors. This rule applies to children and young adults up to age 24, targeting their unearned income from investments.
Here's how it works: If your child's unearned income exceeds the annual threshold ($2,700 for 2025), the excess gets taxed at your higher marginal tax rates instead of their typically lower rates. This prevents wealthy families from shifting investment income to their children simply to reduce taxes.
The kiddie tax applies to:
Planning tip: Consider timing investment sales or distributions to spread income across multiple years, keeping annual amounts below the threshold.
If you've been funding a Coverdell Education Savings Account (CESA) for a child or grandchild, mark their 30th birthday on your calendar. The account must be liquidated within 30 days after they turn 30.
Any earnings not used for qualified education expenses become taxable and subject to a 10% penalty. However, you can avoid this by rolling the balance into a CESA for a younger family member before the deadline.
Planning tip: Start planning the account's future well before the beneficiary turns 30, especially if they won't be using all the funds for education.
Turning 50 brings a valuable gift from the IRS: the ability to make catch-up contributions to your retirement accounts. These extra contributions help you accelerate your retirement savings when you're typically earning peak income.
For 2025, if you're 50 or older, you can contribute:
Planning tip: If you're behind on retirement savings, maximize these catch-up contributions. The tax benefits and compound growth can significantly impact your retirement security.
Lose your job at 55 or older? You might have more flexibility than you think. If you permanently leave your employer after reaching age 55, you can generally take distributions from that employer's 401(k) or 403(b) plan without the usual 10% early withdrawal penalty.
This rule provides valuable flexibility for early retirees or those facing unexpected job loss. However, it only applies to the specific employer plan where you worked—not to IRAs or other employer plans.
Important note: While you avoid the penalty, you'll still owe regular income tax on the distributions.
At age 59½, the retirement account penalty doors swing wide open. You can now take distributions from any tax-favored retirement account—IRAs, 401(k)s, pensions—without the 10% early withdrawal penalty.
This milestone gives you complete flexibility to access your retirement funds, though you'll still owe income tax on distributions from traditional (pre-tax) accounts.
Planning tip: Even though you can access funds penalty-free, consider whether you actually need to. Leaving money to grow tax-deferred can significantly boost your long-term wealth.
The government recognizes that people in their early 60s are in their final sprint toward retirement. That's why catch-up contribution limits get even more generous for ages 60-63.
For 2025, if you're between 60-63, you can contribute:
These enhanced limits recognize that many people haven't saved enough for retirement and need these final years to catch up.
At age 73, the IRS stops letting you defer taxes indefinitely. You must begin taking required minimum distributions (RMDs) from most tax-deferred retirement accounts, including:
The RMD amount is calculated based on your account balance and life expectancy. Miss an RMD, and you could face a penalty of up to 25% of the shortfall amount.
Exception: If you're still working after 73 and don't own more than 5% of your employer's business, you can delay RMDs from that employer's plan until you retire.
Planning tip: Consider converting some traditional IRA funds to a Roth IRA before age 73 to reduce future RMD obligations.
Understanding these milestones helps you make proactive decisions rather than reactive ones. Here are some strategic considerations:
For young families: Plan investment strategies around the kiddie tax, and consider the timing of gifts and trust distributions.
For mid-career professionals: Maximize catch-up contributions and understand your options if you face job changes in your 50s.
For pre-retirees: Take advantage of enhanced catch-up contributions and plan your withdrawal strategy before RMDs begin.
For retirees: Develop a tax-efficient withdrawal strategy that minimizes the impact of RMDs on your overall tax situation.
These age-related tax rules create both opportunities and obligations throughout your life. The key is understanding them before they affect you, not after.
Consider reviewing your current situation with a tax professional who can help you optimize your strategy based on your specific circumstances. Whether you're planning for a child's education, maximizing retirement contributions, or preparing for required distributions, proactive planning can save you thousands in taxes and penalties.
Remember, tax laws change regularly, and individual circumstances vary widely. What works for one person might not be optimal for another. Professional guidance can help you navigate these complex rules and make decisions that align with your broader financial goals.
Contact us to discuss how these tax milestones might affect your specific situation and develop a personalized strategy that keeps you on track toward your financial objectives.