How Advisers Can Help Clients Navigate IRA Contributions After 70½

From the age cap on contributions to qualified charitable distributions and taxes, here are some things advisers need to review with clients.
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One of the provisions of the SECURE Act eliminated the age limit on traditional IRA contributions. Here is what your clients need to know to navigate IRA contributions after 70½.

The SECURE Act eliminated the age cap on contributions to traditional IRAs which had previously been 70½. This means that as long as someone has earned income, they are eligible to contribute to an IRA regardless of their age. This now puts traditional IRAs on a level playing field with Roth IRAs and 401(k)s in terms of not having a maximum age restriction for making contributions.

RMDs and IRA Contributions

Your client will need to take RMDs from their traditional IRA account once they reach the required age regardless of whether or not they continue to make contributions to the account. It’s important to weigh the tax benefit of making pre-tax contributions now versus the fact that the contribution will eventually have to come out as part of the client’s RMD and be taxed at that point in time.

Morningstar’s Christine Benz points out that one of the major advantages of investing inside of a traditional IRA account is the opportunity for tax-deferred growth. She adds that contributions made later in life to a traditional IRA will have fewer years to enjoy this tax-deferred growth due to both the life expectancy of the account holder and the potential impact of RMDs.

For clients who are working and who are covered by a 401(k) plan contributing to their company’s 401(k) can be a good option instead of or in addition to a traditional IRA. As long as their employer has made the proper election for their plan and your client is not a 5% or more owner of the business, they can defer RMDs on the money in their employer’s 401(k) as long as they are working there.

Traditional IRA Contributions and QCDs

The ability to contribute to a traditional IRA past age 70½ can become complicated if your client uses qualified charitable distributions (QCDs). According to industry expert Michael Kitces, under the SECURE Act any contributions made to a traditional IRA account after the age of 70½ would reduce the amount that could be used to make QCDs in subsequent years.

The intent of this rule under the SECURE Act was likely to prevent IRA account holders from making a pre-tax contribution to their IRA and then turning around and doing a QCD and essentially double dipping on the tax benefits of both transactions.

For clients who might like to do both a pre-tax IRA contribution and a QCD this will make the QCD more complicated. As their adviser, it behooves you to help them analyze if doing both makes sense, or if they may be better off not doing the pre-tax IRA contribution in favor of being able to take full advantage of the tax benefits of the QCD.

Roth Contributions

For older clients with earned income, contributing to a Roth IRA versus a traditional IRA might make sense. While they won’t receive a current year tax benefit, the Roth contributions will not be subject to RMDs and will be allowed to grow tax-free. If your client decides to withdraw some or all of the money in their Roth account, it will come out tax-free as long as the five-year rule and other requirements are met.

Besides not being subject to RMDs, Roth IRAs have an added estate planning benefit under the SECURE Act. The new rules require most non-spousal beneficiaries to withdraw the entire account balance of an inherited IRA within 10 years of inheriting it. This includes Roth IRAs. Assuming the account holder had met the five-year rule before they died, these withdrawals will be tax-free.

Note that the same income limitations on making a Roth contribution apply to everyone regardless of age. If your client earns too much, their ability to contribute to a Roth IRA will be reduced or eliminated altogether.

Taxes

Taxes and IRAs are always intertwined. For clients with earned income past the age of 70½, their current tax situation compared to their anticipated tax bracket in the future will be a consideration. If they are in a high tax bracket now, the ability to make a pre-tax contribution might still be beneficial.

Many of your clients may continue to work past the age of 70½. Contributing to an IRA can be a good option for them.