Wage earners are not permitted to put money into a traditional IRA in the year they turn 70 ½ according to the Kiplinger article, “Tax-Smart Ways to Save When You're Too Old for a Traditional IRA.” But you would still be able to contribute to a Roth IRA, as long as your income in 2017 is less than $133,000 if single or $196,000 if married and file taxes jointly. In addition to the money growing tax-free in the Roth IRA with no time limit, you don’t have to take any RMDs (required minimum distributions).
You can contribute up to the amount you earned for the year (your net income from self-employment), with a maximum of $6,500—that’s $5,500 for everyone under age 50, plus $1,000 for people age 50 and older. If your earnings are well over the $6,500 maximum, you can just contribute that amount. However, if your earnings are near or under the maximum, you’ll need to know what is considered compensation and how to calculate your allowed contribution.
For that information, see IRS Publication 590-A, Individual Retirement Arrangements. It notes that starting in 2015, you can make just one rollover from an IRA to another (or the same) IRA in any one-year period—regardless of the number of IRAs you own. You can continue to make unlimited trustee-to-trustee transfers between IRAs because it is not considered a rollover. In addition, you can also make as many rollovers from a traditional IRA to a Roth IRA (known as “conversions”).
If you’re self-employed, you can contribute to a solo 401(k), deduct your contribution now, and defer taxes on the money until it’s withdrawn. However, since you’re over age 70½, you are required to take required minimum distributions from the solo 401(k). Still working as an employee at age 70½? You don’t have to take an RMD from your 401(k) plan, unless you own 5% or more of the company. If you own 5% or more of the company, you do have to take RMDs.
If you haven’t already thought about how to include your retirement accounts in your estate plan, start now. There are significant planning opportunities with qualified retirement plans, especially IRAs. Naming a trust as a beneficiary of an IRA could create significant tax-deferral and wealth accumulation opportunities, especially for younger beneficiaries, such as grandchildren. To do this right, you must work with an experienced estate planning attorney, as there are detailed IRS rules to follow. However, the benefits to future generations can be significant—under some circumstances, leaving a $100,000 inherited IRA to a grandchild could result in a lifetime payout of $5.87 million!*
Consider carrying on your tax smarts into future generations by working with an experienced estate planning attorney to create an inherited IRA strategy. For more information on this and other estate planning topics, explore our website and contact us to schedule your consultation today!
Reference: Kiplinger (August 19, 2016) “Tax-Smart Ways to Save When You're Too Old for a Traditional IRA”
*Assumes a 15-year-old grandchild taking out only required minimum distributions at an 8% annual return with a stable tax rate (40%) on taxes paid and investment of after-tax RMD amount, keeping the remaining IRA intact.