If you’re still working and making a good income when you reach age 701/2, the more power to you. And if you are, you may still want to take advantage of contributing to your retirement account. You can still contribute, but not to your traditional IRA. Here’s the scoop…
Your individual retirement account (IRA) is one of the government-regulated retirement plans. They were created to help people save for their retirement. They all require yearly contributions to come only from working income – not investment income. Working income refers to – in IRS lingo – earned income; all other income they call unearned income, believe it or not!
In any case, most all these qualified plans allow you a tax-deduction for your limited yearly contributions to them. This money then grows tax-deferred. When you finally withdraw it, it’s all taxed as income – since it was all deducted from income.
And the IRS wants that income tax eventually paid. So most all qualified plans required you to make minimum required distributions (MRDs) when you turn 701/2. And when a plan requires you to make MRDs, you can’t keep contributing to them at the same time. That’s why you can’t contribute to your traditional IRA after you turn 701/2.
*Use a Roth:
The Roth IRA is an exception to this contribution age limit. That’s because there’s no deduction for earned income contributions to it. The contributions can, still, only be made with after tax working income. So the IRS gets its income tax ‘up front’. The benefits are that your Roth IRA earnings on your contributions are tax-free (not tax-deferred); and you can withdraw them tax free too. The unique part – and extremely good part – of the Roth IRA is that the earnings on your contributions are never taxed.
But since you paid the income tax up front, you don’t have to make any RMDs ever – although your Roth IRA beneficiary will have to – but his withdrawals still remain tax free. And with no RMD required, you can still make your contributions to your Roth IRA as long as you create working (i.e. earned) income – no matter how old you are.
But, of course, those Roth IRA contributions can only be made the income tax is paid on them – and are limited too, as always, to prescribed yearly contribution limits. So the IRS get’s its piece of the action upfront.
Shane Flait helps you with your financial legal, tax, and retirement goals.
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