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Should You Contribute to an IRA When You’re Already Retired?

Retiring is a massive shift in your lifestyle. It’s also a major change in your finances. 

Just because you’re retired doesn’t mean you need to quit optimizing your money for tax savings, though.

One way many people focus on lowering their tax burden is retirement contributions. Two tools often used are traditional and Roth IRAs. These can help people focused on setting up their finances for retirement before retiring. 

These options either give you a tax deduction today or tax-free income in retirement in most cases.

But is it possible to continue to contribute to an IRA in retirement?

The answer may surprise you.

It may also give you more ways to lower your overall tax burden.

Can You Contribute to an IRA as a Retired Person?

Yes, you can contribute to an IRA after retiring (with caveats).

In the recent past, you could not contribute to a traditional IRA once you reached the year in which you turn age 70 and ½.

On the other hand, there has never been an age restriction to contribute to a Roth IRA.

Thankfully, the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) changes this. This law makes it so there is no longer an age restriction to make traditional IRA contributions. This starts in the tax year 2020.

Of course, there are still other rules you must follow to be able to contribute to a traditional or Roth IRA.

Here’s what you need to know.

Rules for Traditional IRAs

Traditional IRA contributions are limited to $6,000 per year in 2020.

If you’re age 50 or older, that limit is increased to $7,000. The additional $1,000 is called a catch-up contribution.

These limits apply to all IRA contributions of any type. It is not just for traditional IRA contributions.

Earned income

In order to contribute to a traditional IRA, you must have earned income on your tax return.

Examples of earned income include W-2 wages from a part-time or full-time job as well as self-employment income. (It does not include Social Security income or investment income.)

You’d think a retired person wouldn’t have any earned income.

However, it’s entirely possible to consider yourself retired and still work a few small contracts or jobs on the side to bring in some extra money. 

If the money is earned income, it could allow you to contribute to a traditional IRA. 

Married filing jointly

Additionally, married filing jointly couples can make contributions to both individual’s IRAs.

The key is:

One of the spouses must have had enough taxable compensation. This is called a spousal IRA.

Your contribution limit for a traditional IRA will be one of two numbers.

It will either be the contribution limit for the year or your taxable compensation for the year, whichever is greater.

Tax deductibility

Another key concept to consider is whether your traditional IRA contribution will be tax-deductible.

If you don’t have a retirement plan available to you or your spouse at work, the entire contribution is tax-deductible.

If you or your spouse do have access to a workplace retirement plan, you need to check to see if your contribution is deductible. The determination is based on your modified adjusted gross income (MAGI).

Single filers/head of household

If you file your tax return as single or head of household, your MAGI must be $65,000 or less to fully deduct your contributions. 

Your contributions aren’t tax-deductible if your MAGI is above $75,000. If it is in between these two numbers, the tax-deductibility of your contributions may be partial.

Married filing jointly

For those married filing jointly, the numbers are slightly higher. Your MAGI must be $104,000 or less to have fully deductible contributions. 

MAGI above $124,000 results in no deduction. If your MAGI falls between these numbers, your contributions are partially deductible.

Rules for Roth IRAs

Your Roth IRA has the same annual contribution limits as a traditional IRA.

The limit for those under age 50 is $6,000 per year. Those age 50 or older have a higher limit of $7,000 thanks to the $1,000 catch up contribution. 

Just like with a traditional IRA, the total contributions to all IRAs must be less than your limit for the year.

Now:

Just like with a traditional IRA, you must also have earned income to make Roth IRA contributions. The same spousal IRA rules apply, as well.

Unlike traditional IRAs, Roth IRA contributions aren’t tax-deductible. Instead, you get to withdraw the money tax-free after you reach age 59 and ½.

Roth IRAs have income limits.

These determine how much you are able to contribute to a Roth IRA. If you earn too much money, you can’t contribute to a Roth IRA at all.

Single/head of household

Single and head of household filing individuals can make contributions up to the standard limits as long as their AGI is less than $124,000. If their AGI is $139,000 or over, you can’t contribute to a Roth IRA at all. 

A partial contribution is allowed for MAGIs between those amounts.

Married filing jointly

Married filing jointly couples have higher limits. You can make a full Roth IRA contribution as long as MAGI is under $196,000. If your MAGI is $206,000 or over, you can’t contribute at all. 

The Roth IRA contribution limit is modified for MAGIs between those two amounts.

Pros

Contributing to an IRA or Roth IRA in retirement has benefits, depending on your particular situation.

Tax deductions

Contributing to a traditional IRA today gives you the ability to get a tax deduction this year.

Of course:

This is based on your contribution being tax-deductible. If it is, this lowers your taxable income and the amount of tax you pay. 

If you’re in a higher tax bracket this year than you plan to be in the future, it may make sense to take this deduction today.

This way, you can defer the taxes to a future year in which you hope to pay a lower income tax rate.

"Prepay" taxes

Contributing to a Roth IRA today can also be useful. If you’re currently in a lower income tax bracket today than you expect to be in the future, you can essentially prepay your taxes today by contributing to a Roth IRA.

In the future years when you’re in a higher tax bracket, you can withdraw the money you contribute to the Roth IRA tax-free. 

Of course, this assumes you’re age 59 and ½ or older and meet any other requirements.

Cons

There are downsides to making IRA contributions in retirement, too.

Less spending ability

When you make contributions, that’s less money you have available to spend today. 

If you simply withdraw the money as soon as you put it in, there’s no benefit. 

In order to be able to take advantage of this tax planning opportunity, you need to have more than enough income to sustain your expenses.

The reality is:

Not everyone has this luxury.

Uncertainty

While we can make the best plans on how much income tax we think we’ll pay in the future, there is no way to know for sure.

The federal government may increase income tax rates. You may have a significant accident and need to withdraw a substantial amount of money all in one year putting you in a much higher than expected tax bracket. 

The possibilities are endless and could ruin even the best plans.

Tips for IRA Contributions in Retirement

If you’re able to contribute to an IRA when you’re retired, it may offer you additional tax savings. 

Verify earned income

First, make sure you actually have the taxable compensation required to make the traditional IRA or Roth IRA contributions you’re considering.

For traditional IRA contributions, make sure you understand whether your contributions will be tax-deductible, partially deductible or not deductible based on your filing status and MAGI.

For Roth IRA contributions, make sure you’re allowed to contribute to a Roth IRA in the first place. Compare your MAGI and filing status to the income limits to determine how much you can contribute.

Once you’ve determined what can be done, take a look at your personal finances.

Can you afford to set some money aside for IRA contributions?

If not, making a contribution doesn’t make much sense.

Evaluate current and future tax situations

If you can, carefully consider your current tax situation with your potential future tax situation. Then, make a contribution based on the best option to optimize your tax planning.

Not everyone is in a position to be able to do this based on their personal finances.

If you aren’t able to, don’t worry.

Instead, focus on working with the tools you have available to you to minimize your tax liability.

Should You Contribute to an IRA in Retirement if You Can?

Ultimately, you’ll have to decide whether contributing to an IRA in retirement is a smart move for you.

If you’re not sure, consider consulting with a tax professional, financial advisor or both. 

These professionals can help analyze your current tax situation.

Then, they can help determine the best overall strategy to lower your income taxes while giving you access to the money you need.