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.
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.”