In the wake of the Secure Act, a wide-ranging piece of retirement legislation passed in 2019’s waning days, the death of the stretch IRA and delayed required minimum distribution received the lion’s share of the chatter in retirement- and tax-planning circles.
But a related provision that received less attention allows account owners to continue making contributions to traditional IRAs after age 72, provided they have earned income. Prior to the Secure Act’s passage, people couldn’t contribute to a traditional IRA if they were of RMD age or older: 70 1/2. (Roth IRA contributions at any age have long been allowed, so long as the contributor—or their spouse—meets the earned income requirement.)
The delayed age for first-time RMDs and the lifting of the age limit for traditional IRA contributions are both nods to the fact that Americans are working longer than they once did. More than 20% of people over age 65 were working or looking for work in 2019, nearly double the percentage of people 65 and older who were employed in 1985, according to data from the Bureau of Labor Statistics.
The fact that people are working longer is an outgrowth of increasing rates of longevity and declining pension coverage, both of which stress finances in retirement. But it’s also worth noting that people 65-plus who work longer today tend to be wealthier, healthier, and better-educated than 65-year-olds as a group. Enter the new rules about delayed RMDs and removing traditional IRA contribution age limits: More-affluent older workers are less inclined to need their RMDs and are also more likely to have the discretionary cash on hand to make additional contributions when they have earned income.
The question is, even though traditional IRA contributions are available to older workers, even those who need to take RMDs, are such contributions advisable? After all, RMDs will need to come out at the same time those new contributions are going in.
The short answer is that additional traditional IRA contributions after RMD age may make sense in a handful of situations, but not many.
There Is No IRA Contribution Age Limit, but Other Restrictions Apply
Before we go any further, let’s review the rules about retirement contributions for older adults.
Essentially, the lifting of the age requirement for traditional IRAs brings the accounts into line with the other key account types. Roth IRAs don’t carry age limits on contributions, and workers can also contribute to their company retirement plans (like 401(k)s) and delay RMDs from those accounts, provided they’re still employed and not a primary owner of the business. The Secure Act simply harmonizes the rules related to traditional IRAs with those other vehicles.
Yet, even as the Secure Act lifts the age limit on traditional IRA contributions, IRA contributions still carry strictures. Having earned income is the first one: Your income from paid work in the year for which you’re making the contribution must be at least equal to or above the amount of the contribution. Note that spousal income counts. Even if you personally didn’t have any earned income, if your 73-year-old spouse earned $15,000 from a consulting gig in a given year and wanted to make $7,000 IRA contributions for each of you, that would be perfectly allowable. Income from a job, net earnings from self-employment, and disability benefits received prior to minimum retirement age all count as earned income. Income from other common sources—Social Security, portfolio income, pension income, annuity payments, RMDs, and rental properties—does not count.
Even though you’re required to have earned income to make an IRA contribution, income limits apply to IRA contributions regardless of your age. The contribution limits for traditional IRA contributions that you can deduct on your tax return are the most stringent; Roth IRA contributions are allowable at a higher income limit. Anyone can make a traditional nondeductible IRA contribution, regardless of income or age. Those contributions could then be converted to Roth for a “backdoor Roth IRA.” However, such a maneuver will entail tax costs in the (likely) scenario that a retiree has significant traditional IRA assets that have never been taxed yet.
Should You Make IRA Contributions After RMD Age?
So, removing the traditional IRA contribution age limit has lifted the floodgates for contributions later in life. But if you can make an IRA contribution, should you? Or would you be better off saving in a taxable account instead?
Generally speaking, the longer the holding period, the greater the tax benefits of utilizing any type of tax-sheltered savings vehicle. Young accumulators, for example, have many years to benefit from the tax-deferred compounding on their money. Not only can they stash away assets without paying taxes on them, in the case of deductible contributions, but they won’t owe any taxes on the money on a year-to-year basis, either. In the case of Roth contributions, they’ll benefit from tax-free compounding in the years leading up to retirement and will also be able to take tax-free withdrawals on the account in retirement. The longer the holding period, the greater the appreciation and the greater the tax-saving benefit of using some type of tax-sheltered wrapper.
Contributions to IRAs made later in life benefit less from the tax-sheltered compounding than do early contributions simply because of a domino effect: With a shorter time horizon, the investment gains are less, and so are the taxes due upon them. Taking advantage of IRAs for additional savings later in life carries tax benefits and will often be preferable to investing in a taxable brokerage account for older adults who have earned income, but those tax benefits will tend to be modest.
Moreover, investments in traditional IRAs benefit even less from that tax-sheltered compounding than do Roth IRA contributions, because traditional IRAs are subject to RMDs that are eventually taxable. Tax- and financial-planning expert Jeffrey Levine described traditional IRA contributions after RMD age as “a little bit like a revolving door of IRA money.”
By contrast, Roth IRA contributions made later in life have the opportunity to grow beyond RMD age. Because they’re not subject to RMDs, Roth IRA contributions are a solid choice for earners who are mainly saving to leave assets behind for their heirs and won’t expect to spend the money during their own lifetimes; the tax benefits are stretched out over a much longer time frame. Ditto for additional contributions to company retirement plans like 401(k)s: Provided the older worker has earned income, she can continue to make contributions and won’t need to take RMDs as long as she is employed. Moreover, income limits don’t apply to company-retirement plan contributions, in contrast with IRAs.
When Should You Contribute to a Traditional IRA Instead of a Roth IRA Later in Life?
Yet even as Roth IRAs or company retirement plans tend to be better receptacles for additional contributions from older workers, a traditional IRA may be a fit in a handful of situations.
The key one is for the older worker who is playing catch-up on retirement savings: The contributor can deduct the traditional IRA contribution on her taxes. Taxes will be due on that contribution when it eventually comes out of the account, but if the contributor expects to be in a lower tax bracket at the time of the withdrawal, taking the tax break while working will have been worth it.
Traditional IRA contributions later in life may also make sense if the individual earns too much to contribute to a Roth IRA directly; in that instance, the contributor can take advantage of the “backdoor Roth IRA” maneuver, funding the traditional IRA and then converting to Roth. But there’s a significant caveat in that the pro rata rule affects the taxation of the conversion, and many older adults have significant traditional IRA assets. Converting the funds will trigger a tax bill in that instance.
A previous version of this article appeared on Nov. 18, 2022.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.