Should I start investing in a Roth IRA at 70 years old?
I'll be 70.5 years old in December. I am told I'll have to take a certain amount out of my retirement plan. I don't want the money right now. What would be the best way to invest those funds? I am thinking about a Roth IRA.
This is a great question and congratulations on not needing your RMD each year.
You would not be able to utilize the monies from the RMD to directly fund a Roth IRA. In order to make a Roth IRA contribution, you would need to have earned income. Earned income is needed to make a contribution to a Roth IRA, so unless you have earned income this is a no.
You may want to consider converting some or all of your IRA to a Roth. You would pay the taxes upon conversion but the monies would grow tax free going forward and you would not be required to take any RMD's on the funds in the Roth IRA.
Best of luck and be sure to consult with your advisory team to review what strategy would be best for you.
You could start investing in a Roth IRA as long as you have earned income, unfortunately your RMDs do not qualify as earned income.
That certain amount of money you are being told that you will need to start taking out of your retirement plan is according to the Internal Revenue Service (IRS) your required minimum distributions (RMDs). RMDs begin at 70½, and if you do not take your RMDs there is a 50% tax penalty which ensures the government gets tax revenue from tax sheltered retirement accounts.
The accounts subject to RMDs are:
- Traditional IRAs
- Rollover IRAs
- Inherited IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k), 403(b) and 457(b)s
- Keogh Plans
There are no required minimum distributions for a Roth IRA (unless you inherited the account), though RMDs are required for Roth 401(k)s.
You have to take your first required minimum distribution no later than April 1 of the year after the year you turn 70½. After your first RMD year, you need to make your required distributions by December 31 of each successive year. You do not want to wait until April 1 of the year after you turn 70½, because then you will have to take two distributions in the same year, and that could elevate you into a steeper tax bracket, increasing your taxes due.
Additionally, if you are 70 or older, still working and do not own more than 5% of the company you work for, you can delay your RMD from a 401(k) until you retire.
The financial firm that holds your IRA should let you know a RMD will be due and send you a 1099-R form reporting the distribution. Although you have to calculate the RMD separately for each IRA, you can take the total RMD due from either a single IRA or from a combination of them but not from a Roth IRA.
Also, although you can withdraw more than the required minimum, you cannot use the excess to meet the RMD requirements in future years.
For employer-sponsored retirement plans and inherited IRAs, you must not only calculate their RMDs separately, you must make the distributions from their respective accounts.
Read more: Income Taxes and Your Retirement Accounts | Investopedia https://www.investopedia.com/advisor-network/articles/income-taxes-and-your-retirement-accounts/#ixzz4v8UYWKpb
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I am assuming you are asking this because of the Required Minimum Distribution (RMD) you have to start taking on your IRA? The answer is a simple and unequivocal, NO! Why? Unless you are earning income from a job, you can't contribute to a Roth. Next issue, you are going to be 70 1/2 and doing a Roth Conversion spread out over the next five years will cost you a tremendous amount more in tax liability because you have to report the income from the conversion of IRA money to a Roth, and then on top of it all, you have to wait five years in order to take any of the growth from the Roth Conversion. So I have a better idea, there is a little known strategy that allows you to take IRA money and put it into a Universal Life Insurance policy over a five year period, and each year the life insurance pays the tax on the IRA money you take to pay for the life insurance. You reduce your RMD almost immediately and permanently, and you will have tax-free money you can access, and lastly you have a tax-free death benefit to pass on to your heirs. Or you can do nothing and the IRS will start getting paid next year, and the year after that, and the year after that, until you pass away and the IRS becomes your main beneficiary.
When you have an Individual Retirement Account (IRA), you are required to take annual Required Minimum Distributions once you've reached the age of 70 1/2. So if your plan is an IRA and you'll reach that age is December, you'd be well advised to take the initial distribution this year, even though it could be postponed until next year.
If you don't need the money right now, you could start a Roth IRA, but you need to be aware that funds contributed to a Roth IRA must be in the account for five years before being withdrawn. The good news for you is that the five-year period starts from January 1st of the year in which you make the initial contribution. Even so, funds withdrawn prematurely are subject to a 10% early withdrawal penalty.
If the retirement plan you are referred to is a company-sponsored, qualified retirement plan such as a 401(k), there is no requirement to make withdrawals.
I work with a lot of people over 70.5 who don't want or need their RMDs. If you are still working contributing to a ROTH IRA or ROTH 401(K) can be a great option. You can also still contribute to a regular 401(K)- and if you have it with your current employer it won't be subject to required minimum distributions