Is it worth it for my husband to contribute to his 401(k), despite his age?
My husband is 72 years old and he was recently offered a one year contract to work. The company has a 401(k) plan. He plans to contribute $25,000 for that 1 year of work. Is it worth it to contribute since he is already 72 years old? By the time he leaves office, he will start withdrawing RMDs.
The RMD for a 74 year old on $25,000 is just over $1,000. So by contributing $25,000 to a 401(k), you defer taxes on $25,000 of taxable income. According to the IRS life expectancy table, that $25,000 will be withdrawn from the IRA over the next 23.5 years, which allows you to continue to defer taxes on the gains made on the balance over that time.
As long as you have more than $25,000 of taxable income, I would make the contribution.
Will he receive any employee match for the one year of service? Many employers offer a contribution match, up to a certain amount. If yes, then it's worth it.
If no, then the answer is a little bit more complicated. It will depend on his tax rate during the year of service and afterward. if your tax bracket is higher during the year of service, but it will fall once he retires and starts withdrawing RMDs, then it will be worth contributing to a 401(k) plan.
I believe it is always worth contributing to a 401(k) assuming that the company matches at least some portion of that contribution, which most companies do. Otherwise, that would be essentially free money being left on the table.
The RMD would most likely not be required as long as he works there (just for that account); but yes, if it is pre-tax dollars, he would be required to take the RMD. Even worse, the rules for inherited IRAs may be changing. If interested, see my video:
One option is to make Roth contributions or if available, make NRAT (non-roth, after-tax) contributions and then convert to the Roth. Then you don't have to worry about RMDs. You are right, one year of tax-free growth is not a lot and I see a lot of post-RMD couples that are forced into higher tax brackets. The other options are finding ways to deal with RMDs, like charity strategies, or use a taxable tax-efficient account.
You could also let the account in question grow and take the RMD amount from all other accounts.
Mark Struthers CFA, CFP®
Current limits on salary deferral for those age 50 or older is $24,000. By contributing to the 401(k), you will be reducing your taxable income by that amount. The RMDs, after he leaves, will be far less in comparison to the amount contributed for the year.
Best of luck,
David N. Waldrop, CFP