Understanding the Landscape Without Age Limits
The Internal Revenue Service (IRS) implemented a crucial change to Individual Retirement Accounts (IRAs) in 2020, affecting both traditional and Roth IRAs. This change eliminated age limits that previously restricted regular contributions to these accounts. But what does this mean for you, especially if you’re 70 or older and contemplating contributing to your IRA? While a cursory look might suggest that making contributions at this age may not be beneficial, a deeper analysis of your personal financial situation could tell a different story.
Tax Benefits of IRAs: Who Gains the Most?
The tax advantage is one of the most compelling reasons to contribute to an IRA. Contributions to traditional IRAs may be tax deductible, providing you with an upfront tax break. Both traditional and Roth IRAs also offer the benefits of tax-deferred or tax-free compounded account growth, respectively.
The magic of compound growth in a tax-advantaged environment becomes extremely potent for those who can let their contributions sit untouched for extended periods. However, it’s important to note that once you reach the age of 72, you are required to start taking Required Minimum Distributions (RMDs) from your traditional IRA. This means that part of the funds you contribute could be returned to you shortly, somewhat negating the benefits of tax-deferred growth.
Timing and Tax Brackets: A Strategic View
Before making any contributions, it’s vital to consider your current tax bracket relative to what you anticipate it will be in the future. If you’re confident that you are in a higher tax bracket now than you will be later on, making a deductible contribution to a traditional IRA can be a savvy move. It allows you to defer income taxes on those funds until you expect to be in a lower tax bracket.
Keep in mind that you must have “earned income” to be eligible for making an IRA contribution. Income from investments, such as interest, dividends, and capital gains, do not qualify as earned income – only money made from active employment or self-employment counts.
The Caveats: Earned Income and RMDs
The earned income requirement is one of the biggest constraints to making an IRA contribution post-retirement. If you’re retired and no longer earning a salary or wage, you cannot contribute to an IRA unless you have some other form of earned income. This could come from part-time work, consulting, or any other form of active income.
Additionally, it’s crucial to remember that RMDs kick in at age 72 for traditional IRAs. If you’ve deferred a lot of income into your IRA, the RMDs could potentially push you into a higher tax bracket, reducing some of the benefits of tax deferral.
Making Informed Choices
Removing age limits on IRA contributions opens up new investment and retirement planning avenues. While the general consensus may suggest that it’s not advantageous for retirees aged 70 and above to contribute, personalized financial analysis could offer a different perspective. The value of contributing to an IRA at this stage in life will largely depend on your current tax situation, your expected future tax bracket, and whether you have the required earned income.
For further information on IRA contributions, RMDs, or other aspects of retirement planning, Legacy Private Trust Company invites you to visit our comprehensive archive of Retirement Planning blog posts. Your individual circumstances are unique, and we are here to help guide you through the complexities of retirement planning.
If you are a Legacy client and have questions, please do not hesitate to contact your Legacy advisor. If you are not a Legacy client and are interested in learning more about our approach to personalized wealth management, please contact us at 920.967.5020 or email@example.com.
This newsletter is provided for informational purposes only.
It is not intended as legal, accounting, or financial planning advice.