Should Older Workers Contribute to IRAs?
Thanks to the Setting Every Community Up for Retirement Enhancement Act of 2019, older workers with earned income—including those who’ve already started taking required minimum distributions (RMDs)1 at age 72—can now make contributions to tax-deferred traditional IRA accounts. But does it make sense to do so?
“Under the right circumstances, contributing to an IRA as an older worker can complement your tax strategy,” says Hayden Adams, CPA, CFP®, director of tax and financial planning at the Schwab Center for Financial Research. For example, contributing could make sense if you want to:
1. Lower your taxable income
If you earn less than $76,000 in 2021 ($125,000 if married) or don’t have access to a workplace retirement plan, you can deduct traditional IRA contributions, thereby reducing your taxable income for the year (up to the annual contribution limit of $7,000 for those ages 50 and older).
If your deductible contributions reduce your income to less than $25,000 ($32,000 if married), you can even avoid having your Social Security benefits taxed. (Admittedly, this is quite a low ceiling and may not be possible for retirees with significant savings.)
2. Benefit from a lower tax bracket in retirement
Making tax-deductible contributions to a traditional IRA now, if eligible, allows you to defer paying taxes until you’re in a potentially lower tax bracket in retirement. This could be especially advantageous for workers who expect to retire in the next few years and want to beef up their savings before they leave the workforce.
3. Perform a backdoor Roth conversion
If your income exceeds Roth IRA contribution limits—$140,000 for individuals in 2021, $208,000 if married—you may be able to make after-tax contributions to a traditional IRA and then convert the funds to a Roth IRA.2 “Once you’re 59½ or older and have held the account for five years, you can withdraw contributions and earnings from a Roth totally tax-free,” Hayden says. “Plus, such accounts aren’t subject to RMDs.”
“Older workers have a fair number of saving options now,” Hayden continues, “so it’s wise to work with a financial planner or tax professional to determine how best to achieve your retirement goals.”
1Those who turned 70 before 07/01/2019 were required to take RMDs starting at 70½.
2The IRS’ pro rata rule requires that you include all your IRA assets—meaning those funded with pretax (deductible) contributions and those funded with after-tax (nondeductible) contributions—when calculating the conversion's taxes.