With many people living and working longer, there are important tax saving opportunities to contribute, defer, or convert well past age 70 ½.
A nice reminder by William H. Byrnes, and Robert Bloink is in their article “The Post-70 1/2 Retirement Plan Contribution Rules” about options to continue contributions which reads in part:
The rules for post-70 ½ IRA contributions depend upon whether the account is a traditional IRA, Roth IRA or SEP IRA. Direct contributions to a traditional IRA are not permitted after the client reaches age 70 ½, although the client may roll funds from another type of retirement account into his or her traditional IRA.
Conversely, the client may contribute directly to a Roth IRA after he or she has reached age 70 ½ (up to the annual $6,500 limit, which includes a $1,000 catch up amount). Direct Roth IRA contributions, however, are subject to income limitations that apply to reduce the contribution limits for taxpayers who earn more than $184,000 (married taxpayers) or $117,000 (single taxpayers) in 2016.
This means that although you can continue to contribute to your Roth IRA if you are under the income limits, if you are over those limits you can’t do a backdoor Roth after age 70 ½. You can, however, convert some of your traditional IRA to a Roth IRA after taking our your required minimum distribution.
If you are still working, you can avoid required minimum distributions and continue contributions to your employer-sponsored 401(k) or SEP IRA. You also don’t need to start taking required minimum distributions so long as you do not own 5% or more of the company:
Clients who are still working after age 70 ½ may generally continue contributing to employer-sponsored 401(k) accounts and SEP IRAs. In fact, employers must continue to make employer contributions to the SEP IRA of an employee who is over age 70 ½ if it makes similar contributions to younger employees’ accounts.
If the client plans to work past age 70 ½, he or she can avoid RMDs by leaving the funds in the employer-sponsored 401(k). As long as the client continues to work for the same employer that sponsors that plan, and does not own 5% or more of the company, he or she can avoid taking distributions from a 401(k), thereby avoiding the associated income tax liability that those distributions generate.
There are great tax savings opportunities between age 70 ½ and age 90. Which options provide the best tax savings depends on your specific situation.