Experts: Are There Advantages To Retiring Before the End of the Year?

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Believe it or not, we are almost at the end of the year. If you are planning to retire soon, you may be wondering if you should pull the trigger before the new year arrives or if it’s better to wait it out.

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GOBankingRates spoke with financial experts to find out if there are advantages to making your retirement official before the calendar year closes out — here’s what they had to say.

Why It Might Be Advantageous To Retire Before the End of the Year

Depending on your circumstances, there may be tax advantages to retiring before the year ends.

“Retiring before the end of the year allows you to take advantage of a potential tax bracket reduction due to lower income, especially if you retire 30 to 60 days prior to the end of the year,” said Steve Sexton, retirement planning professional and CEO of Sexton Advisory Group.

This is applicable if you plan on making a Roth IRA conversion.

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“Retiring before the end of the year will lower your income and ‘free up’ some tax room for doing a Roth conversion,” said Brandon Renfro, a fee-only financial planner at Belonging Wealth Management.

If you do the Roth conversion before you retire, you may also avoid income-related monthly adjustment amount (IRMAA) penalties, Renfro said.

“Medicare premiums are based in part on your income,” he said. “When your income is over certain levels, your premium increases — the income-related monthly adjustment amount. A Roth conversion is included in your taxable income so would normally impact your IRMAA, but you can get an exception when you have a ‘life-changing event.’ The Social Security Administration specifically names retirement as a life-changing event. So, if your income is higher this year because you did the Roth conversion, it may not ultimately impact your Medicare premium if you appeal by submitting the Medicare IRMAA Life-Changing Event form.”

There may be other advantages to retiring before the end of the year related to your benefits, Sexton said.

“For example, if your company provides an incentive to retire — like providing an increase in pension payout or a bonus to retire early — you might want to consider taking advantage of these benefits,” he said.

Potential Drawbacks of Retiring Before the End of the Year

It’s important to weigh the potential advantages and disadvantages of retiring this year versus next year before deciding on your timing. There are some possible drawbacks to retiring before the end of the year.

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“If you retire in November 2022, you are subject to the COLA (cost-of-living adjustment) for the year 2022,” Sexton said. “If you retire in January 2023, you will have an extra year of credit towards your services, as well as the 2023 COLA.”

In addition to having increased Social Security benefits, waiting until the new year could also be beneficial if you have access to a pension plan.

“If you have a pension, it is better to retire at the beginning of the year as you will receive a COLA for the new year, plus an extra year’s credit,” Sexton said. “If your income is lower in retirement, you will also reduce your tax bracket.”

How Your Age Plays a Role in the Optimal Timing

In addition to the time of year, you also need to take your age into account.

“The longer you wait to retire, the more money you could receive from Social Security and your pension,” Sexton said. “Additionally, if you are under the age of 59 and a half and do not have non-qualified assets to draw from, you could be subject to an early withdrawal penalty if you withdraw from your IRA or 401(k).”

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Your age also affects whether or not you will need to make a required minimum distribution (RMD) from your retirement accounts if you retire before the end of the year.

“If you’re over age 72 and you worked all year and decided to retire in September, you will still be required to take an RMD for that year,” said Melissa Shaw, wealth management advisor at TIAA. “This means nine months of employment compensation and the RMD, which will add to your taxable income. If you choose to wait until January to retire, you will only have the RMD as taxable income.”

For example, let’s see what happens in the case of a 73-year-old woman who makes $100,000 a year, has $1 million in her 401(k) and decides to retire before the end of the year.

“If she retires in September, she will have received $75,000 in income. If her RMD rate is around 3.8%, this equates to $38,000 based on her $1 million 401(k),” Shaw said. “This brings her taxable income from employment and RMDs to $113,000 for the year. If she were to choose to work the rest of the year, her taxable income would be $100,000 for the year, but if she retires on Jan. 1 of the following year, she would only have the RMD of $38,000.”

The Bottom Line

The time of year you decide to retire does matter, Sexton said, but the “best” time will depend on your individual circumstances.

“It all depends on your age, benefits, pensions and more,” he said. “Sometimes it is better to retire at the end of the year because of lucrative company incentives to retire. In other cases, it might be more prudent to retire at the beginning of the year if this means you’ll receive more in pension benefits, COLA allocation and Social Security. Regardless, you’ll want to look at all your assets, guaranteed income and taxes to determine when is the best time for you to retire.”

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About the Author

Gabrielle joined GOBankingRates in 2017 and brings with her a decade of experience in the journalism industry. Before joining the team, she was a staff writer-reporter for People Magazine and People.com. Her work has also appeared on E! Online, Us Weekly, Patch, Sweety High and Discover Los Angeles, and she has been featured on “Good Morning America” as a celebrity news expert. 
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