While there are many tax-advantaged retirement savings plans, the various options and rules can make the most sophisticated of us cringe. One of the things to consider is whether you can continue funding your retirement account after you reach the age of 70 ½ (6 calendar months after you reach your 70th birthday). Here is what you need to know if you wish to have this option.
The Basics: the 70 ½ age-based limit
A number of retirement accounts no longer allow you to contribute funds after you reach age 70 ½ or older. Many of these same accounts also trigger Required Minimum Distributions (RMD) rules after this age 70 ½ date. So not only must you stop contributing funds into your retirement account, you must also withdraw some of it and pay income tax on the withdrawal. This is true with 401(k) accounts after retirement and traditional IRA accounts. The RMD rules aside, here are some options for you should you wish to continue making retirement plan contributions.
- Look into Roth accounts. Roth IRAs and Roth 401(k) accounts allow you to continue making contributions after 70 ½. In fact you can continue to contribute into these accounts for as long as you have income. However, there are differences. Roth IRA’s have income limitations and are not subject to RMD rules. In the case of a Roth 401(k), you can contribute as long as you are working and are a participant in your employer’s plan, but you are subject to RMD regulations. While contributions must be made with after-tax earnings, your marginal tax rate is probably lower once you reach retirement age.
- The SIMPLE IRA option. There is not an age limit for contributions into this type of small business IRA account. So if you plan to continue to build your retirement nest egg after reaching age 70 ½, look into this type of retirement plan. An added bonus in this retirement account is that continued participation also includes receiving any employer match funding. The downside is that this plan requires annual distributions after reaching the 70 ½ year old age limit.
- Contributions while still working. If you work for an employer after retirement age you can continue to participate in employer sponsored plans. So if you are looking to supplement your income after age 70 and your employer offers a 401(k) or similar program you can continue to participate no matter your age as long as you are employed and are active within the plan.
The rules around retirement plan contributions and distributions are complex. Not the least of which are rules placing limits on 5% or greater owners of small businesses. Should you wish to explore your contribution options, please ask for assistance prior to taking action.