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Advising Clients on IRA Contributions After Age 70½

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What You Need to Know

  • The Secure Act removed the age restrictions on traditional IRA contributions.
  • Traditional IRA contributions made after age 70 ½ can complicate the use of QCDs for your clients.
  • Choosing between a Roth or traditional IRA contribution for clients with earned income should be done as part of their overall tax and financial planning strategy.

The Setting Every Community Up for Retirement Enhancement (Secure) Act contains a number of provisions that affect retirement planning. One provision that might benefit some of your clients is the lifting of the restriction on contributions to a traditional IRA after age 70 ½. 

This now adds traditional IRAs to Roth IRAs and 401(k)s as potential places for clients to continue to save for retirement. Here are some things to consider in advising clients in making IRA contributions after age 70 ½. 

Roth IRAs 

Even before the Secure Act, those with earned income could contribute to a Roth IRA after age 70 ½. The income limitations on the ability to make Roth IRA contributions apply to all retirement savers regardless of age. 

Roth IRA contributions are made with after-tax contributions but offer a number of planning benefits for clients — for one, they aren’t subject to required minimum distributions. With the changes to the inherited IRA rules for most non-spousal beneficiaries under the SECURE Act, Roth IRAs offer tax-free withdrawals for these beneficiaries as long as your client has satisfied the five-year rule prior to their death. 

RMDs and Traditional IRA Contributions 

“Traditional IRA contributions benefit folks in their 70s who need to catch up, are planning to retire later in life or who are high earners and need to defer taxes for a few more years,” says Travis Gatzemeier, a certified financial planner at Kinetix Financial Planning. “The downside is that the investments have less time to make a positive impact through tax-deferred compounding due to the impact of RMDs.” 

QCDs and Traditional IRAs 

Some of your clients may divert a portion of their RMDs into qualified charitable distributions (QCDs). For those who are charitably inclined, this can be a tax-efficient way to make charitable contributions, especially for clients who are not able to itemize deductions on their tax return. 

“The tax deduction for traditional IRA contributions is nice, but it’s important to understand that if your client plans to use those IRA assets to make future QCDs, those post-70½ contributions cannot be claimed as part of a QCD,” Tyler Aubrey, CFP of Define Financial says. “If a QCD is made, the post-70½ contributions are treated on a last-in-first-out (LIFO) basis, meaning their QCDs will have less of an impact right out of the gate until all of their post-70½ contributions have been withdrawn from the IRA.” 

Tax Planning

There are a number of tax and financial planning considerations in advising clients on IRA contributions after the age of 70 ½, including: 

  • The client’s current and anticipated future tax bracket. This will help determine whether a Roth or traditional IRA contribution makes the most sense.
  • Tax diversification in terms of their retirement savings. If they are heavily invested in traditional IRA and 401(k) accounts, it might make sense to divert contributions to a Roth IRA to diversify their retirement tax base a bit.
  • Roth IRA funds are not subject to RMDs and can have tax advantage for non-spousal heirs under the Secure Act. Both features can be woven into your client’s estate planning. 

As many of your clients continue to work after age 70 ½, IRA contributions can make a lot of sense. They will need your help in determining the best strategy for their situation. 

(Photo: Shutterstock)

Roger Wohlner is a financial writer with over 20 years of industry experience as a financial advisor.