The rules of the game may change when you hit the milestone age of 70½—and make your taxable income soar—but you can still reap the tax benefits of putting money into a retirement account until you formally and fully retire. If you find yourself still working at this point of your life, you are probably either trying to seal a crack in your nest egg or you are one of those people who will only be ready to retire when they pry your cold dead hands from your desk. Either way, knowing you have options can make a difference in your bottom line.

In the year you turn 70½, the tax system puts the lid on traditional IRA contributions and pulls the plug on your retirement accounts in the form of required minimum distributions (RMDs)s. When you are earning wages and pulling out RMDs, the tax consequences can result in higher tax rates and an increased percentage of your Social Security benefits being subjected to taxes.

When your taxable income starts to bulge during that period of your life, continuing to put money into a 401(k)-type retirement plan or a Roth IRA can still be useful. Let's take a look at the major differences among the most popular retirement plan options and examine how to structure your plans to optimize your distributions after you become subject to the new rules of reaching 70½.

Retirement Account Highlights

The changes that come at 70½ can be a shock if you haven't been paying attention to the details of retirement-account regulations. Here's what happens to the key types of retirement accounts and how you can continue to save while you're still working.

Traditional IRA

Once you turn 70½, you are no longer allowed to contribute to a traditional IRA. In addition, you must begin the process of taking annual RMDs.

Roth IRA

Anyone with earned wages may contribute to a Roth IRA, and there is no mandate requiring the contributor or his or her spouse to make RMDs.

Traditional 401(k)

Regardless of age, if you are still working you can continue to contribute to a 401(k). What's more, as long as you own less than 5% of the business you are working for, you are not required to take RMDs from a 401(k) at that employer.

Roth 401(k)

Regardless of age, if you are still working you can contribute the full amount of your salary deferral to a Roth 401(k). Like the traditional 401(k), RMDs are required once you separate from service or if you own more than 5% of the business that employs you. This is a key difference between a Roth 401(k) and its Roth IRA counterpart. However, the distributions may not be taxable (check with your tax advisor).


Retirement Plan Solutions For 70+ Workers

Which Retirement Plan Is Better?

The answer may be different when you pass 70½.

Traditional IRA vs. Pretax 401(k)

If you are older than 70½, you lose the ability to contribute to a traditional IRA. On the other hand, there is no age restriction placed on the 70+ crowd for contributions to a 401(k), so this option is still a possibility.

In many cases, the older worker is a self-employed consultant or contractor: if that's your situation, be aware of the RMD requirements placed on the 5% or greater business owner. At first glance, the idea of contributing to a plan that requires you to take RMDs each year sounds silly, but if you do the math it's really not a bad deal.

Example: Pretax 401(k)
In 2019, a 75-year-old self-employed worker making $80,000 contributed $22,000 to his new 401(k); the plan has a December 31, 2019, balance of $22,000. The 2020 RMD for the now 76-year-old worker will only be $1,000. If you take the end of year balance of $22,000 and divide it by the RMD factor of a 76-year-old, 22, you end up with a taxable distribution of $1,000. After all is said and done, the net result for the individual would be a $21,000 deduction instead of a $22,000 deduction.

The point here is that the opportunity to save is not drastically diminished because you have to make RMDs while you are working.

Winner by Disqualification: Pretax 401(k)

Roth IRA vs. Roth 401(k)

If you are over 70½ and you are working, you can contribute to both types of accounts. While the income restrictions governing who can contribute to a Roth IRA can be difficult to overcome, it isn't impossible. The reason it isn't impossible is that the income ceiling doesn't factor into Roth conversions and rollovers. There are tax considerations in making many types of Roth conversions, so research the implications for you carefully with a tax advisor. Once you do have money in a Roth IRA, however, there are no RMDs in your lifetime, or your spouse's.

On the other hand, the Roth 401(k) has no income limitations that you need to deal with. However, you need to be aware that Roth 401(k)s are eventually subject to RMDs.

Winner for Easiest Contribution Category: Roth 401(k)
Overall Winner and Winner of the Final Destination Category: Roth IRA

Additional Strategies

What else can you do to continue to build your retirement nest if you're still working in your 70s? Some additional advice:

Consolidate and Plug Your RMD Hole

It is almost a certainty that an individual working into his or her 70s will have multiple IRAs and other types of retirement plans floating around. As a result, those floating accounts will be forced to make annual RMD withdrawals. If that same individual owns less than 5% of the business he or she is working for and the plan administrator allows it, this person could roll over any existing IRAs and retirement plans into his or her current employer's plan. This is true as long as the individual has not separated from service and is still working.

Once the individual successfully rolls over the existing assets into the employer's plan, he or she should be relieved of having to take annual RMDs from those assets. The wild card in this scenario is almost always the plan document and administrator. If everything is copacetic and you are able to reduce your RMDs while you are working, you will have the opportunity to create room for doing a Roth conversion or the relief of evening out your tax burden until you fully retire.

Use the State Income Tax 'Filter' If You Qualify

While it depends on the state in which you live and file your taxes, some states that impose a state income tax provide more favorable tax treatment to individuals who make contributions to and take distributions from IRAs and other qualified plans. In Illinois for example, the government doesn't add your 401(k) contributions back into your state income calculation; it also allows residents to subtract most distributions from IRAs and qualified plans from their taxable income.

"State tax filter" loopholes exist because states want to encourage their residents to stay in-state and not jump ship for no-income-tax states like Florida or Texas when they retire. That said, the loophole can be a noose if you work in a state like Pennsylvania and then retire to a state like California. In that situation, you can get taxed on the way in and the way out. How you incorporate these existing loopholes into your savings strategy will depend on your goals and your particular set of circumstances, including your CPA's advice!

Example: Taking RMDs From a Roth 401(k)
An individual who could take a look at this strategy is someone who is more than 70 years old, is self-employed and is making contributions to a Roth 401(k). In this case, if they alter their savings strategy by contributing to a pretax 401(k) and converting an outside IRA instead, they might be able to reduce their state income tax burden and avoid having to take RMDs from their Roth 401(k), which is an after-tax account.

The Bottom Line

The working crowd over 70 still has the ability to save and defer taxes through Roth IRAs and qualified plans that don't exist for their retired peers. By incorporating these and other tools into their overall strategy, the nearly retired may be able to legitimately reduce their overall tax burden. However, the targeted beneficiary for retirement plans isn't always the contributor, so each individual's strategy should take into account that individual's specific goals as well as the surrounding facts and circumstances.

Anyone attempting to take advantage of these strategies needs to be aware that the rules surrounding their implementation are complicated and the laws can change overnight. At the end of the day, you should execute any plan incorporating these or similar types of strategies only after receiving sound advice from a qualified tax professional in consultation with your retirement plan administrator.