How Long Can Retirees Contribute to Their IRAs?

Now that tax time has passed, many Americans are looking toward the next tax year, and they have a lot of questions about individual retirement accounts (IRAs). One big question: “If I turn 70 1/2 in January 2016, can I still make deposits into my traditional IRA?” (As a reminder, a traditional IRA is a retirement savings vehicle to which you contribute pre-tax dollars. The money grows tax-deferred, and you withdraw it in retirement, paying taxes on it then.)

The answer is yes. Because you will not reach age 70 1/2 in 2015, you are eligible to make a contribution for the 2015 tax year (which is the year before the year in which you turn 70 1/2).

The maximum contribution is $5,500, with one possible addition. Because you’re older than 50, you qualify for the 2015 “catch-up” contribution of $1,000, meaning in 2015 you can contribute up to $6,500.

There are some caveats. For example, you may not contribute more than 100% of your earned income, which consists of wages or salary from work but not dividend interest from your investments. So, if your earned income for 2015 will be less than $6,500, you may not contribute the full amount.

When it comes to withdrawing from an IRA, at age 59 1/2 anyone can begin taking distributions from his or her IRA without penalty. There are no penalties if you also take distributions up to the full balance of your account.

What is regulated are required minimum distributions (RMDs), which you must begin taking by April 1 of the year following the year in which you turn 70 1/2 (in this case, April 1, 2017). As listed by IRS Publication 590, your RMDs are determined by taking the total balance of all your IRAs as of December 31 of the prior year and dividing that number by your life expectancy.

Clearly, this is complicated, which is why it’s helpful to have an advisor to guide you.

Consider Your Tax-Deferred Retirement Savings Options

If you’re saving for retirement, it’s a good idea to understand the tax-deferred investment vehicles that are available to you. In these vehicles, the returns you make from your invested money are not reduced by income taxes annually; you only pay taxes when you withdraw the money in retirement (when you are usually in a lower tax bracket and will therefore pay less tax on the distributions.) These tax-deferred investment vehicles include:

Employer-sponsored retirement plans, such as defined benefit plans, which are usually referred to as pension plans and provide specific benefits in retirement; and defined contribution plans (such as 401(k) and 403(b) plans), which make a specific contribution to an account in your name and retirement benefits are based on the account’s investment performance.

Individual retirement accounts (IRAs) such as traditional IRAs (to which anyone can contribute) and SEP IRAs (for self-employed individuals and smaller employers). These are similar to employer-sponsored retirement plans except that you purchase them yourself. In Roth IRAs, you make after-tax contributions, and investment income accrues tax-free; under most circumstances, distributions are not taxed.

Annuities, which provide a stream of income for a certain period or for your lifetime. They are available as variable annuities, in which investment returns are based on investment experience, and fixed annuities, whereby you receive a guaranteed rate of return.

There are different eligibility rules for each investment vehicle, such as income limits, age requirements, and contribution limits.