Talking to Older Clients About Ongoing IRA Contributions

Advisors know that older workers with earned income must start taking required minimum distributions (RMDs) from retirement accounts at age 72.

However, that doesn’t mean tax-advantaged retirement savings options are off the table for older investors. This is a critical conversation for advisors to have because data confirm people are living longer and one of the primary retirement concerns remains outliving savings.

Additionally, and on a brighter note, while many retirees transition out of their traditional jobs, hence “retirement”, they don’t necessarily leave the workforce altogether. Some consult. Others tutor. Others just want to get out of the house for a few hours a day and stay connected to other folks, so they drive for Lyft or Uber.

Translation: Simply because someone is retired doesn’t mean they’re not earning income and by virtue of the facts that folks that check that box are likely earning less income and taking RMDs, there are tax implications to consider.

Tax Tips to Evaluate

It seems like prosaic advice, but it’s also relevant. An easy for folks taking RMDs that also have earned income is to lower taxable income.

“If you earn less than $78,000 in 2022 ($129,000 if married) or don't have access to a workplace retirement plan, you may be able to deduct traditional IRA contributions, thereby reducing your taxable income for the year (up to the annual contribution limit of $7,000 for those ages 50 and older),” according to Charles Schwab research. “If your deductible contributions reduce your income to less than $25,000 ($32,000 if married), you can even avoid having your Social Security benefits taxed. (Admittedly, this is quite a low ceiling and may not be possible for retirees with significant savings.)”

That’s an important because, due to changes in the tax code, there’s no longer an age cap on IRA contributions.

“For 2020 and later, there is no age limit on making regular contributions to traditional or Roth IRAs,” notes the IRS. “For 2019, if you’re 70 ½ or older, you can't make a regular contribution to a traditional IRA. However, you can still contribute to a Roth IRA and make rollover contributions to a Roth or traditional IRA regardless of your age.”

Other Ideas to Consider

Another step for investors to consider is lowering their tax bracket in retirement. Sounds desirable… and difficult. In reality, it’s certainly the former and with the help of a professional, it’s not the latter.

“Making tax-deductible contributions to a traditional IRA now, if eligible, allows you to defer paying taxes until you’re in a potentially lower tax bracket in retirement. This could be especially advantageous for workers who expect to retire in the next few years and want to beef up their savings before they leave the workforce,” adds Schwab.

Another idea for investors to evaluate is the backdoor Roth conversion – something that some billionaires made controversial. Still, it’s a move that’s practical – and legal – for ordinary market participants.

“Once you're 59½ or older and have held the account for five years, you can withdraw contributions and earnings from a Roth totally tax-free,” says Hayden Adams, CPA, CFP®, director of tax and financial planning at the Schwab Center for Financial Research. “"Plus, such accounts aren't subject to RMDs."