IRA Contributions After Retirement

Are you retired and considering making a contribution to your IRA? This is a question I do see and get from time to time from people approaching retirement or already in their retirement. There is no clear-cut answer to this question, but we can examine some general ideas about how to approach this situation. The short answer to this question is that it depends on a few key factors and we will take a look at them in just a second. Oh yes the short answer, yes you can provided you meet some guidelines which are the key factors I just mentioned.

In the first scenario, we will assume you are over the age of 65 but younger than 70 ½ and work a part-time job. Provided you meet the income guidelines established by the IRS in the year you worked part-time you would have what they call earned income. This is income that you have earned from sources other than investments, rental property, Social Security, pensions, and required minimum distributions from Traditional IRA accounts. Yes, this means you had an actual part-time job that you earned money from.

Okay since you are over the age of 50 you can contribute up to $6,500 annually into your IRA provided you have at least that much in earned income. If you have less, you may contribute up to the amount you made in a calendar year into an IRA. So should you? And if so what kind of IRA should you open to benefit the most. Here I will give a generic answer and go with a ROTH IRA as they do not have required minimum distributions at age 70 ½. That way your money can grow tax-free for as long as you leave it in the account and it can even be passed on to your heirs. If you were to place the money in a Traditional IRA starting at age 65, it would at the most have five and a half years to grow tax-deferred as you are not allowed to make any further contributions after age 70 ½, and you are required to begin taking the money out at that age.

But a ROTH IRA does not have that limitation placed on it. There are no required minimum distributions at age 70 ½, and as long as you have earned income you can continue to contribute to the account. That means if you work five years and make the maximum contribution of $6,500 you would have put $32,500 into the ROTH IRA. Now let us say you earn a relatively healthy 6% return on that money you would have $38,840 at the end of the five years when you are 70 years old. Now let us say you will not need the money in the ROTH IRA until you are age 80 which gives it another ten years of growth. At the end of that period, you would have $69,555 which would be tax-free. And if you never needed the money you would be able to leave it to your heirs, and it would continue to grow while they are required to take out annual minimum required distributions based on their life expectancy.

Now if you are retired and have no earned income and are taking your required minimum distributions you cannot use that money to contribute to a ROTH IRA. But there is no reason why you cannot use that money to invest in a taxable brokerage account that you will be responsible for paying taxes on any gains and income such as dividends. But if you hold the securities for longer than a year your gains would be long-term capital gains taxed at 15% or less depending on your total taxable income. And when you do die with a brokerage account, and you leave it to an heir they will have a new cost basis known as a bump-up if the asset has appreciated in value to the value at the time of your death. So if you bought Apple at $150 a share and it is worth $300 a share when you die there is no taxable event on the gain of $150 a share as your heir’s costs basis would now be $300 and you never realized the gains in the asset.

Just because you are retired does not mean you have to stop investing. You have options available to you with regards to IRA’s and any type of brokerage account. And if you accidentally make an IRA contribution there are some IRS forms that you will need to fill out and depending on the type of error you made there may also be a penalty associated with the contribution. So if you are retired, it may make sense for you to seel the advice of a tax professional or a qualified financial planner before you make any IRA contributions.

As always, if you have any questions or comments, please feel free to contact me or leave a message here on the website.

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