How To Grow Your Retirement Account After 70 1/2

IRA conversionHere’s the conundrum:  Americans are working longer because they need to save more for retirement but they can’t contribute to their retirement accounts after age 70 ½.

You are not allowed to contribute to a traditional IRA starting in the year you turn 70½. One solution? A Roth IRA. You’re still able to contribute to that IRA at any age. That money can grow tax-free in the account indefinitely, and you don’t have to take required minimum distributions (RMDs).

To qualify for a Roth IRA, your income in 2016 has to be less than $132,000 if you’re single or $194,000 if you’re married and file taxes jointly.  You can contribute up to the amount you earned for the year (your net income from self-employment) with a maximum of $6,500—that’s $5,500 for everyone under age 50, plus $1,000 for people age 50 and older. If your earnings are well over the $6,500 maximum, you can just contribute that amount. However, if your earnings are near or under the maximum, you’ll need to know what is considered compensation and how to calculate your allowed contribution.

For that information, see IRS Publication 590, Individual Retirement Arrangements. It notes that starting in 2015, you can make just one rollover from an IRA to another (or the same) IRA in any one-year period—regardless of the number of IRAs you own. You can continue to make unlimited trustee-to-trustee transfers between IRAs because it is not considered a rollover. In addition, you can also make as many rollovers from a traditional IRA to a Roth IRA (known as “conversions”).  Hey, the feds love those tax dollars!

Here's a nice benefit if you’re self-employed:  you can contribute to a solo 401(k), deduct your contribution now and defer taxes on the money until it’s withdrawn. However, once you’re over age 70½, you are required to take required minimum distributions from the solo 401(k).

Here’s another solution: employees usually don’t have to take RMDs from their current employer’s 401(k) if they’re still working at age 70½.  That's a great workaround if you are trying to increase your retirement account.  Unfortunately, if your the boss that solution won’t work even if the plan is not a solo 401K because the IRS rule doesn’t apply if you own 5% or more of the company; you're stuck taking the RMDs.

Reference: Kiplinger (August 19, 2016) “Tax-Smart Ways to Save When You're Too Old for a Traditional IRA”


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