Retirement Plan Solutions for Workers 70 and Older

Cash preservation when working after 70

The rules of the game may change when you hit the milestone age of 72 and have to start taking required minimum distributions (RMDs) from your non-Roth retirement accounts, making 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 in your life, you either are probably trying to seal a crack in your nest egg or are one of those people who will be ready to retire only when absolutely necessary. Either way, knowing you have options can make a difference in your bottom line.

Key Takeaways

  • At age 72, you must begin taking required minimum distributions (RMDs) from your non-Roth retirement accounts.
  • Prior to the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in December 2019, the age to start RMDs was 70½.
  • Workers over age 72 are at risk of having higher taxable income because they earn income and probably must withdraw RMDs.
  • Certain strategies, such as continuing to contribute to retirement accounts, can reduce the higher taxable income for someone older than 72.
  • Workers over age 72 can still contribute to an IRA, a 401(k), and other retirement accounts, depending on specific circumstances.

Retirement Plan RMDs

The year when you turn 72, the tax system pulls the plug on your retirement accounts in the form of RMDs. 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.

For many years, RMDs began at age 70½, but following the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in December 2019, the age was raised to 72. Similarly, previous law used to put the lid on traditional individual retirement account (traditional IRA) contributions after age 70½, but the new law does not have an age cutoff and allows additional contributions as long as you are still working.

Nonetheless, at age 72, you have to start taking RMDs if you have retirement accounts that require them. This boosts your taxable income, unless you make other adjustments. 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 be useful. Note that people who are still employed are not required to take RMDs from a 401(k) that they have through their current employer unless they own 5% or more of the company.

You’ll have higher costs for Medicare Part B premiums and Medicare prescription drug coverage if your modified adjusted gross income (MAGI) is greater than $182,000 and you’re married filing jointly. If you file under a different status, you’ll pay more for Medicare if your MAGI is higher than $91,000.

Let’s take a look at the most popular retirement plan options and how to structure your plans to optimize distributions after you reach age 72.

Retirement Account Highlights

The changes that come at age 72 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

Under the new law, you are allowed to contribute to a traditional IRA regardless of your age. Under the old law, you could no longer contribute to a traditional IRA once you turned 70½.

Roth IRA

Anyone with earned income—regardless of age—can contribute to a Roth IRA, and there is no mandate requiring the contributor or their spouse to take RMDs.

Traditional 401(k)

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

Roth 401(k)

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

Which Retirement Plan Is Better?

The answer may be different when you pass age 72. Here’s a closer look.

Traditional IRA vs. Pretax 401(k)

It used to be that if you were older than 70½, you lost the ability to contribute to a traditional IRA. But under the new law, there are no age restrictions. There is also no age restriction placed on the 70+ crowd for contributions to a 401(k).

Nonetheless, 2021 and 2022 contribution limits for a 401(k) are higher than those of an IRA, making the 401(k) ultimately a better choice.

With an IRA, contributions are capped at $6,000 per year, or $7,000 if you’re 50 or older, for 2021 and 2022. But for 401(k)s, the limit was $19,500 for 2021 (increasing to $20,500 in 2022) with an additional catch-up contribution for those over age 50 of $6,500, for a total of $26,000 (increasing to $27,000 in 2022, with the same catch-up limit).

In many cases, the older worker is a self-employed consultant or contractor. If that’s your situation, be aware of the RMD mandates 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

In 2021, a 75-year-old self-employed worker making $80,000 contributed $22,000 to their 401(k); the plan has a Dec. 31, 2021, balance of $22,000. The 2022 RMD for the now-76-year-old worker will be only $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 take RMDs while you are working.

Roth IRA vs. Roth 401(k)

If you are over age 72 and 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, they aren’t impossible. That’s because 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 carefully with a tax advisor. Once you do have money in a Roth IRA, however, there are no RMDs in your or your spouse’s lifetimes.

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

The winner for the easiest-contribution category is the Roth 401(k). However, the overall winner and winner of the final destination category is the Roth IRA. If you’re opening your first Roth IRA, however, be aware of the five-year rule about when you can begin taking tax-free distributions of earnings.

Additional Strategies

What else can you do to continue to build your retirement nest if you’re still working in your 70s? Below is some additional advice.

Consolidate and Plug Your RMD Hole

Many individuals working into their 70s have multiple IRAs and other types of retirement plans floating around. They will be required to make annual RMD withdrawals from many of those accounts.

If that same individual owns less than 5% of the business and is still working for the company (and the plan administrator allows it), this person could roll over any existing IRAs and retirement plans into their 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, they 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 leveling out your tax burden—until you fully retire.

Use the State Income Tax ‘Filter’ If You Qualify

While it depends on the state where 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.

If your combined income is $25,000 to $34,000—or $32,000 to $44,000 if you’re married filing jointly—up to 50% of your Social Security benefits may be taxed. If your combined income is more than $34,000 (more than $44,000 for married couples filing jointly), then up to 85% of your benefits may be taxed.

State tax filter loopholes exist because states want to encourage their residents to stay 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 older than 72, self-employed, and 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, then 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.

How do I calculate my required minimum distribution (RMD)?

To calculate your required minimum distribution (RMD), locate the Internal Revenue Service’s RMD Table needed to calculate your distribution. This can be found in IRS Publication 590-B. Once you locate your age on the IRS Uniform Lifetime Table, it will have a corresponding life expectancy factor. Next, divide your retirement account balance as of Dec. 31 of the previous year by the appropriate life expectancy factor. This will be your RMD.

At what age do I have to take RMDs?

The age at which you have to start taking RMDs from your retirement accounts is 72. However, Roth IRAs do not have RMDs during the account owner’s lifetime.

How much do I have to withdraw from my 401(k) at age 72?

The RMD that you have to withdraw from your 401(k) at age 72 depends on the balance in your 401(k) account. RMDs depend on your age, which corresponds to a life expectancy factor. Your account balance at the end of the previous year is divided by the life expectancy factor to determine your RMD.

The Bottom Line

The working crowd over age 72 has the ability to save and defer taxes through Roth IRAs and qualified plans. 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 that 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.

Article Sources
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  1. Internal Revenue Service. “Retirement Plan and IRA Required Minimum Distributions FAQs.”

  2. Internal Revenue Service. “Retirement Topics — IRA Contribution Limits.”

  3. Social Security Administration. “Premiums: Rules for Higher-Income Beneficiaries: Monthly Medicare Premiums for 2022.”

  4. Internal Revenue Service. “Roth IRAs.”

  5. Internal Revenue Service. “Retirement Topics — Required Minimum Distributions (RMDs).”

  6. Internal Revenue Service. “Designated Roth Accounts,” Page 2.

  7. U.S. Congress. “H.R.1994 — Setting Every Community Up for Retirement Enhancement Act of 2019: Text,” Section 107.

  8. Internal Revenue Service. “IRS Announces 401(k) Limit Increases to $20,500.”

  9. Internal Revenue Service. “Rollovers of Retirement Plan and IRA Distributions.”

  10. State of Illinois, Department of Revenue. “Does Illinois Tax My Pension, Social Security, or Retirement Income?

  11. Social Security Administration. “Retirement Benefits: Income Taxes and Your Social Security Benefit.”

  12. Internal Revenue Service. “Publication 590-B: Distributions from Individual Retirement Arrangements (IRAs),” Page 45.

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