Dear Rick
I am 75 years old and have been retired for nearly 10 years. My wife passed away a few years ago, and since then I have been bored. My son recommended that I go back to work part time, even though I don’t need the money.
So, here I am working about 15 hours a week. I was told that because I am working, I do not have to take minimum required distributions from my IRA; is that true? In addition, is there a limit on how much money I can put into my IRA? My employer does not have a 401(k) Plan so contributing to an IRA is my only retirement-account option. I’m not sure this is important but in 2020 with my pension and investments, I earned a little over $100,000.
Thank you, Daniel
Dear Daniel
Unfortunately, you must continue to take minimum required distributions out from your IRA. The fact that you are working is immaterial when it comes to required minimum distributions. What you are confused with is minimum required distributions from a 401(k) Plan. There are provisions that while you are employed, you do not have to take required distributions from that company’s 401(k) Plan.
The exception does not apply to IRAs. In addition, the exception for 401(k) Plans may not be available if you are an owner of the company.
With regards to new contributions into an IRA, yes, you are eligible to make a contribution. For 2021, the maximum IRA contribution is $6,000; however, because you are over 50, the maximum is $7,000. Therefore, if you earn at least $7,000 annually, you can put the maximum away. If you earn less than $7,000 then that amount, the amount earned from your wages, would be the maximum allowed contribution.
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In making your IRA contribution I would recommend that you use a Roth IRA, which has many benefits for you. First, Roth IRAs are not subject to the minimum required distribution. Therefore, you can let this money grow tax free for as long as you choose. In addition, you have the benefit that if you should pass away with a balance in your Roth IRA, your beneficiaries would be able to withdraw that money income tax free.
Typically, in a traditional IRA, if you should pass away with a balance in your account, your beneficiaries would have to pay income tax on that money. Furthermore, because of your income, more likely than not you would not qualify for a tax-deductible traditional IRA; therefore, using the Roth IRA is a slam dunk.
Traditionally, many working seniors were not eligible to contribute to a traditional IRA. Seniors who were over 70½ and were taking minimum required distributions were prevented from contributing to traditional IRAs. However, that has changed because of the Secure Act.
The Secure Act, which was passed in 2019, removes the age restrictions with regards to contributions into a traditional IRA. Therefore, working seniors are now eligible for traditional tax deductible IRA contributions. However, like everything else in tax laws, nothing is straightforward. For seniors who are making qualified charitable distributions to a charity from their traditional IRA, there are some complexities about tax deductible IRA contributions after 70½. Therefore, if you have made a qualified charitable distribution, you should talk to your tax advisor before you make a tax-deductible IRA contribution.
For those of you who don’t know, qualified charitable distributions are a way for seniors to donate to charities using their minimum required distributions. This is a great tax saving strategy for someone who currently donates to charity and is not itemizing their deductions.
For seniors who are still working, particularly as in the situation at hand, where money is not the issue, contributing into a Roth IRA can be a very good strategy. Not only does it allow you to have money grow tax free, it is also money that is not subject to minimum required distributions.
Good luck.
Rick Bloom is a fee-only financial advisor. His website is www.bloomadvisors.com. If you would like him to respond to your questions, email rick@bloomadvisors.com.