penalty boxThe second of two blogs excerpted from Emily Brandon’s excellent piece on, headlined 5 Retirement Penalties to Avoid:

“Penalty for failing to take retirement distributions. After you turn age 70½, withdrawals from traditional 401(k)s and IRAs are required. You can add up the required minimum distributions for all your IRAs and take the amount out of any IRA or combination of IRAs of your choice. Meanwhile, 401(k) RMDs must be taken from each individual account to avoid the penalty. Those who fail to withdraw the correct amount are charged a steep 50 percent tax penalty in addition to regular income tax on the amount withdrawn. However, if you are still working and don’t own 5 percent or more of the company you work for, you can delay required minimum distributions from your current 401(k), but not your IRAs or any previous 401(k)s, until April 1 of the year after you retire.

“Your first required minimum distribution is due by April 1 of the year after you turn 70½, but subsequent distributions must be taken by Dec. 31 each year. If you delay your first distribution, you may need to take two distributions in the same year. There are no withdrawal requirements for Roth IRAs, so the money can be withdrawn as you see fit or left to heirs.

“Early Social Security penalty. You can receive the full amount of Social Security you have earned at age 66 for most baby boomers and age 67 for everyone born in 1960 or later. Signing up before this age results in a significant reduction in benefits. For example, a worker born in 1965 who signs up for Social Security at age 62 will get 30 percent smaller payments for the rest of his life than if he waited until age 67 to sign up.

Medicare late enrollment penalties. There’s a seven-month window around your 65th birthday when you can first sign up for Medicare Part B. If you fail to enroll during this period, your monthly premiums will increase by 10 percent for each 12-month period you were eligible for benefits but didn’t claim them, and the higher premiums will last for the rest of your life. If you’re still working after age 65 and get group health coverage through your job, you will need to sign up within eight months of leaving the job or losing the coverage to avoid the penalty. Medicare Part D also has a late enrollment penalty if you don’t sign up on time or have significant gaps in your prescription drug coverage after becoming eligible for Part D, and the penalty increases the longer you go without coverage. Also, if you miss the six-month Medigap initial enrollment period that begins the month you turn 65 and enroll in Part B, you could lose the option to buy a Medigap policy, or it could cost significantly more than if you signed up on time.”