Should You Contribute to Retirement Accounts After 65?

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Once you reach retirement age, it's time to quit dumping money into your retirement savings accounts and start spending it. Or is it? If you're in your late 60s or even early 70s, it may make sense to keep contributing to those accounts even after retirement. This is especially true if your balances aren't as high as you'd like, or you've decided to delay your retirement.

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Retirement contributions after age 50

Once you reach 50, you become eligible to make catch-up contributions to both 401(k)s and IRAs. The idea behind catch-up contributions is to allow workers who are behind on retirement saving to throw a little extra money into the pot. As of 2017, workers 50 and older can contribute an extra $6,000 per year to a 401(k) account and an extra $1,000 per year to an IRA (either traditional or Roth).

On or around your 50th birthday, pull up your retirement savings account balances and do the math on how much income they'll provide versus how much income you'll need. If the numbers are disappointing, now is the time to start maxing out your contributions to those accounts, including catch-up contributions. You're getting close to the finish line, so this is the moment to bring your A-game.

Retirement contributions after you retire

Your chosen retirement date has a major effect on your retirement contribution options, and not just for the obvious reason that you'll probably need to start taking money out of those accounts to live on after that point. In order to contribute to any retirement savings account, you have to have "earned income" for the year. And the amount you contribute can't exceed that earned income. So if you've completely retired, without a part-time job or side gig, you can't contribute to your retirement accounts at all.

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On the other hand, if you decided to keep working part-time, you can keep making account contributions. You may be scratching your head wondering why in the world you'd want to do such a thing, but there's an excellent reason: it gives you the opportunity to move money out of your traditional retirement savings accounts and into a Roth account instead.

For example, let's say that you're retired but have a part-time job that nets you $10,000 per year in earned income. In addition to your wages, you also take $30,000 out of your traditional IRA to live on. Because you have earned income, you have the option to take an extra $6,500 out of your traditional IRA and contribute that much money to a Roth IRA.

The reason this makes sense is because when you later start taking money out of the Roth IRA, the distributions will be tax-free. By transferring your money through the Roth IRA, your converting it from taxable to nontaxable income. Not only will you not have to pay income taxes on those future distributions, but you may also save in taxes on your Social Security benefits. That's right, Social Security benefits may be taxed if you have a certain amount of taxable income from other sources, but since Roth distributions aren't taxable, they don't count toward that limit.

Retirement contributions after age 70 1/2

Once you reach age 70 1/2, you're forbidden to contribute to traditional IRAs even if you're still working. However, if you have earned income, you can contribute to a Roth account. This can come in very handy if your required minimum distributions (RMDs) for the year are higher than you actually need to take.

For example, let's say that you're continuing to need $30,000 per year from your retirement savings accounts when you hit age 70 1/2, but your first required minimum distribution is for $35,000. If you still have that part-time job, you can take the $35,000 out of your traditional IRA, put it in your bank account, then contribute $5,000 from your bank account to your Roth IRA. You'll still have to pay income taxes on the full $35,000, but at least you've put the extra $5,000 back where it can continue to grow tax-free until you actually need it.

Employer-sponsored retirement accounts: A special case

If you're still working after 70 1/2 and your employer gives you access to a 401(k) account, your retirement contribution options will broaden considerably. That's because as long as you're still working for the 401(k)-sponsoring employer, you can keep on making contributions -- and not taking distributions -- even after age 70 1/2.

The same is true for SEP-IRAs, if you happen to be self-employed (which would include most retirees with side gigs). Contributions for a SEP-IRA can come either from the employee or the employer; if you own the business, your contributions to your own account can count either way. After age 70 1/2, you can't contribute anymore as an employee, but you can keep right on contributing as an employer using the same contribution limits as before. You will have to take required minimum distributions from a SEP-IRA once you hit age 70 1/2, however, even if you're still working. But at least you have the option to put on your "employer hat" and put that money right back into the account, along with excess RMDs from other accounts. Thus, a SEP-IRA can be a great tool for any retiree with self-employment income.

Contributing to your retirement accounts late in life isn't a great idea for everyone, but it may be the right move if you need to deal with excessive RMDs or convert some money to nontaxable income. In those situations, the hassle can be well worth the reward.

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