Can Retirees Contribute to a Traditional or Roth IRA?

Tax-advantaged retirement accounts such as traditional and Roth IRAs are important tools for retirement planners accumulating wealth to provide for a secure retirement. And, under the right circumstances, individuals can continue to take advantage of these tax benefits by contributing to traditional or Roth IRAs after they have retired. The key requirement for contributing to a traditional IRA is that the retiree has to have some earned income. Roth contributions by retirees, meanwhile, are subject to income caps. It’s also wise to be aware of the five-year rule that could affect Roth withdrawals.

Have questions about maximizing your retirement account or creating a retirement plan? Consider reaching out to a financial advisor. 

A traditional IRA allows individuals to make pre-tax contributions, meaning that contributions are often tax-deductible in the year they are made. The money in the account grows tax-deferred, and taxes are paid upon withdrawal during retirement. This type of IRA is popular among individuals who expect to be in a lower tax bracket during retirement, as it allows them to defer paying taxes until they potentially have a lower taxable income.

A Roth IRA operates on an after-tax contribution basis. This means that contributions are made with money that has already been taxed, so withdrawals during retirement are generally tax-free (provided certain conditions are met). The main advantage of a Roth IRA is the tax-free income it provides during retirement. This can be helpful for retirees who expect to be in a higher tax bracket in the future, or those who want to avoid taxes on their retirement withdrawals.

Both retired and pre-retirement savers face contribution limits on these accounts. For 2024, the contribution limit is $7,000. If you are age 50 or older, you’re allowed $1,000 in catch-up contributions, bringing the total contribution limit to $8,000. 

Note that these limits apply across both types of IRAs. So if you contribute to both a traditional and a Roth IRA, the total combined contributions cannot exceed your limit.

While traditional IRA and Roth accounts are primarily intended and used to save up for retirement, retirees can continue to contribute to traditional and Roth IRAs as long as they have earned income. This is a new development in the last several years. Previously, traditional IRAs only allowed for contributions up to the age of 70.5, but the SECURE Act of 2019 removed this age limit. The change permits the continued growth of retirement funds and, in the case of Roth IRAs, the ability to withdraw contributions tax-free in the future.

Earned income includes wages, salaries, bonuses and income from self-employment. It does not, however, include income from pensions, Social Security benefits or investment returns. This means that retirees who have part-time jobs, freelance work or other sources of earned income can continue to bolster their retirement savings by contributing to these accounts. 

The five-year rule is one to keep in mind if you are saving using a Roth account. It dictates that in order to withdraw earnings from a Roth IRA tax-free, the account must have been open for at least five years. This rule applies regardless of the account holder’s age.

For example, if you opened a Roth IRA in 2020, you wouldn’t be able to withdraw earnings tax-free until 2025, even if you are over age 59.5. The rule applies separately to each Roth IRA you own. As a result, if you open a new Roth IRA later in life that specific account will have its own five-year waiting period.

The five-year rule also applies to Roth conversions, which you can do even if you have no earned income in retirement. If you convert funds from a traditional IRA to a Roth IRA, a new five-year period begins for the converted amount. Withdrawing converted amounts before the five-year period ends could result in taxes and penalties.

No, contributions to a traditional IRA require earned income. Investment income, such as dividends, interest and capital gains, does not qualify as earned income and therefore cannot be used to make IRA contributions.

Yes, Roth IRA contributions are subject to income limits. For 2024, single filers with a modified adjusted gross income (MAGI) below $146,000 and married couples filing jointly with a MAGI below $230,000 can make a full contribution to a Roth IRA. Those with incomes slightly above these thresholds may be eligible for reduced contributions.

Yes, under the SECURE Act of 2019, there is no longer an age limit for making contributions to a Traditional IRA, as long as the individual has earned income.

Contributing to an IRA without earned income could result in penalties from the IRS. The contribution would be considered excess, and the retiree would need to withdraw the contribution amount and any associated earnings to avoid a penalty.

As long as retirees have earned income, they can continue to contribute to these retirement accounts, allowing for potential growth and tax benefits even after they’ve left the workforce. However, you’ll want to be mindful of the eligibility requirements for contributions, as well as the five-year rule for Roth IRAs. Whether you’re considering a contribution to a traditional or Roth IRA, you can also consider consulting with a financial advisor to ensure you’re making the best decisions for your individual situation.

• A financial advisor can help you analyze and manage investments for your retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Any returns you see in a Roth IRA account depend on the investments you put your assets into. On average, here’s how much you could earn.

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