Should You Invest in an IRA During Retirement?

Contributing to an individual retirement account during retirement isn't a strategy many investors adopt, but it can make sense for those still earning income. That's because continuing to fund an IRA on a tax-deferred basis means more money will be available later in retirement.

"If it doesn't harm the current lifestyle, having extra for the future is seldom a bad thing," says Ilene Davis, CFP professional, a financial adviser with Financial Independence Services in Cocoa, Florida.

For retirees with the necessary earned income who want to contribute to an IRA, the question then becomes how much to contribute and to which type of IRA. Earned income means money from a job; investment income doesn't count. However, if you are retired and your spouse has earned income, your spouse can contribute to his or her IRA, as well as your IRA, which would be a spousal IRA contribution.

Keep in mind that once you begin to take required minimum distributions, or RMDs, from a traditional IRA at age 70 1/2, you can no longer contribute to a traditional IRA, says Richard E. Reyes, CFP professional with Wealth and Business Planning Group in Maitland, Florida. With Roth IRAs, there are no age restrictions for contributions.

Investors age 50 and older can contribute $5,500 for 2015 and 2016, plus a "catch-up" contribution of $1,000 for a total maximum possible IRA contribution of $6,500. That doesn't mean that you have to invest the full amount; any contribution will help build savings for the future. You can make this contribution for the 2015 tax year up to the tax-filing deadline in mid-April.

Pros and cons

Experts agree that it doesn't make sense to invest in an IRA in retirement if you can't afford it, and it takes away from other important priorities. But if you can afford it, it can be beneficial to stash more money away in tax-deferred accounts for retirement, especially with consumers living longer than ever before.

"It's always optimal to save more for retirement so that you have more savings as you spend money through retirement," says Ken Hevert, senior vice president and head of retirement, retirement income and college products at Fidelity Investments.

Many retirees underestimate how much money they will need to get through retirement, especially with health care costs increasing. Hevert sees contributing to an IRA in retirement as one way to fund those health care expenses, which are increasing at a faster rate than inflation.

If you're able to save the maximum amount between the ages of 65 and 70, you can accumulate a tidy sum. For example, if you save $6,500 a year for each of 6 years between 65 and 70 for a total outlay of $39,000, by the time you turn 80, you'd have $63,819, assuming a 4% average real return (meaning over and above the inflation rate).

Roth vs. traditional IRA

Whether to use a Roth or a traditional IRA for those contributions depends on your individual tax situation. Hevert favors the Roth because there is no RMD, so funds can continue to grow throughout retirement and can be tapped at a later date in retirement or left to heirs in an estate.

When contributing to an IRA on a pretax basis, you get the benefit of an upfront tax deduction. But some advisers don't see the point of this strategy since the benefit is temporary.

"There could be some benefit to contributing to a traditional IRA if you are trying to save some dollars in taxes and you are still working, but I don't really find that too appealing because it will be taxed shortly when you begin taking distributions," says Reyes.