Whether a retiree can continue to fund an individual retirement account (IRA) primarily depends on if they have any sort of earned income. Earned income includes wages, salaries, tips, bonuses, commissions, earnings from self-employment, as well as long-term disability and union strike benefits. You cannot contribute anything that comes from other sources, such as capital gains, dividends, or investment interest.
- All retirees can contribute to traditional IRAs if they earn income, according to the SECURE Act of 2019.
- Retirees can continue to contribute earned funds to a Roth IRA indefinitely.
- Contributions cannot be made with unearned income, including money from capital gains, dividends, or investment interest
- You cannot contribute an amount that exceeds your earnings, and you can only contribute up to the annual IRS-set contribution limits.
- People with traditional IRAs must start taking required minimum distributions when they reach 72.
Funding a Traditional IRA
Continuing to contribute to a traditional IRA is possible even if you're officially retired but still work or perform services of any sort that you're paid for (and can document or report on your tax return.
Remember that earned income does not include certain forms of compensation, including those from a pension, an annuity, or Social Security. It also doesn't include investment income or earnings generated by assets. This means that the money you contribute has to be earned from the sweat of your brow, so to speak.
Under the terms of the SECURE Act of 2019, all retirees can now contribute to traditional IRAs if they earn income. The previous contribution cutoff age of 70½ no longer applies. However, holders of traditional IRAs must start taking required minimum distributions (RMDs) at age 72. Also, note that if you were born before July 1, 1949, you must still begin taking RMDs at age 70½.
No matter what your age or employment status, you can never exceed the annual contribution limits set by the IRS for both types of IRAs. For 2021 and 2022, it's $6,000 a year, or $7,000 if you’re age 50 or over.
Funding a Roth IRA
A Roth IRA affords a lot more flexibility. No matter how old you are, you can continue to contribute to your Roth IRA as long as you’re earning income—whether you receive a salary as a staff employee or 1099 income for contract or freelance work. On the flip side, you never have to take distributions from the account either.
Again, the deposits must be made with earned income: wages, fees, etc. So the $1,000 you got paid for a consulting job would be eligible, while your monthly $1,000 Social Security benefit would not count.
Of course, you can never contribute more than the amount you have earned that year. Also, your modified adjusted gross income (MAGI) cannot exceed the general, annual income limits that affect whether you can contribute to a Roth IRA at all—less than $208,000 for married couples filing jointly, but under $140,000 for single taxpayers in 2021. These limits increase for married couples and single filers to $214,000 and $144,000 for the 2022 tax year.
The Bottom Line
Retirement planning is a very important step for anyone to secure their financial future. You want to make sure that you're not going to struggle to keep up your lifestyle and standard of living. But what happens if you've already retired and no longer have any compensation? There is still a way that you can contribute.
If your spouse continues to work and has earned income, they can establish and fund a Roth IRA for you even if you're not actively working. This spousal Roth IRA must be in your name even if your spouse is the one making the contributions.