Mailbag: Can I Contribute To An IRA The Year I Turn 70 1/2?

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Mailbag: Can I Contribute To An IRA The Year I Turn 70 1/2Your article, “Can I Continue Retirement Saving Past Age 70 1/2?“,  states that with a traditional IRA a person who continues to work cannot make a contribution “after the client reaches 70 1/2” Does that mean that a person who is otherwise qualified to make an IRA contribution and who reaches age 70 1/2 in October 2017 can still make a contribution to a traditional IRA for 2017 as long as the contribution is made earlier in the year—say April 2017? Or is a person prohibited from making any IRA contribution for “the year” that the person reaches 70 1/2?

Unfortunately, you cannot contribute to a traditional IRA the year you turn 70 1/2. The IRS wants you to start taking required minimum distributions (RMDs) so they can start collecting their tax. If you could contribute to a traditional IRA and take a tax deduction this would reduce the tax that the IRS collected, therefore, it is not allowed.

Even though you are required to start taking RMDs, you can still take advantage of significant tax planning strategies. Here are six:

1. If you have earned income, you can still contribute to a Roth IRA. This will put some of the money you take out of your traditional IRA into a Roth IRA where it will never be taxed again.

2. After taking out your RMD, you can convert some of your traditional IRA to a Roth account. This reduces every future year’s RMD and puts even more money where it will never be taxed again. It also helps avoid creeping into higher tax brackets during your peak RMD years at age 85+.

3. You can gift some or all of the RMD to charity. This gift from your IRA will avoid having to pay any tax on the distribution.

4. If you have earned income, you can contribute to your spouse’s IRA even if he or she did not have any earned income. You can contribute to your spouse’s traditional IRA to reduce your current year taxes or contribute to your spouse’s Roth IRA to put the money where it will never be taxed again.

5. You can still contribute to a traditional or Roth 401(k). If you are a 5%-or-greater owner of the business you will be required to take RMDs from your traditional 401(k) even though you are still working. But continuing to contribute can still have significant tax savings.

6. If your workplace retirement plan allows, you can roll your traditional IRA into your 401(k). So long as you are working (and not a 5%-or-greater owner) you may not be required to take RMDs from your 401(k).

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818...)