A Senior Citizens Guide to IRAs
Are you over the age of 50 with no retirement savings? Are you a senior over the age of 70 ½ and think you can no longer contribute to an IRA?
There are IRAs for seniors that allow seniors the opportunity to create and make contributions to an IRA. Discover IRA options that best fit your needs and situation. Learn important information about traditional and Roth Individual Retirement Accounts.
The Basics of Individual Retirement Accounts
Seniors that did not save early in life sometimes find themselves with no savings as they near retirement. Perhaps you had no knowledge about Individual Retirement Accounts (IRAs) or simply did not save towards retirement in your younger days because retirement age seemed so far off into the future.
IRAs help individual reach their retirement goals. First created in the 1980s, IRAs started with just the Traditional IRA. The federal government later added the Roth IRA option.
What is the Difference Between the Types of IRAs?
If you are a senior under age 70 ½, and have earned income, you are eligible to contribute to a Traditional IRA. Once you reach 70 ½, you have to start withdrawals on the account by April 1 of the following year. It is imperative that seniors realize that once they start making withdrawals, they can no longer make contributions to a traditional IRA. Failing to take your required minimum distributions in a timely manner potentially results in a 50 percent excise tax on that amount.
Amy E. Buttell explains in a Bankrate article that if your current income is too high to make contributions to a tax-deductible IRA or Roth IRA that you consider a non-deductible IRA. Contributions made to the non-deductible IRA are not tax deductible. Taxpayers often use the services of a tax preparer to wrangle the issues surrounding deductible and non-deductible IRA contributions and income limit regulations.
Roth IRAs are likely an excellent option for many seniors. Roth IRAs are similar in many ways to the Traditional IRA. A major difference is the fact that contributions come from your after-tax earnings. You also have the ability to make contributions after reaching 70 ½ years old because there is no age limit for individuals that open an IRA.
Contributions are not tax-deferred. Withdrawals are also tax-free. There are no minimal contributions to a Roth IRA. There are no required minimum distributions (RMDs) if you choose a Roth IRA. You enjoy tax-free distributions as long as you have the account for a minimum of five years and are over age 59 ½ when taking the first withdrawal.
Seniors with a Roth IRA have the capability of leaving amounts in their account for the duration of their lifetime. Your Roth IRA withdrawals do not count in the calculations to determine if your Social Security benefits are taxable, likely a welcome piece of information for seniors already receiving their benefits from the Social Security Administration.
The IRS explains that contributions are potentially limited by your filing status and income. The more money you make each year, the less you are permitted to contribute to your Roth IRA. Check with the IRS or a tax professional for more information about your Roth IRA, your limitations and your responsibilities.
Traditional vs Roth IRAs
When asked what type of IRA is the best option for a senior retiring in a few years, Kiplinger contributing editor Kimberly Langford indicates that the decision depends on what an individual senior thinks will happen to their tax rate at the time of making withdrawals.
If you opt for a traditional IRA now, you possibly face having to take a lot of money in withdrawals later, which means potentially finding yourself in a higher tax rate, even after your retirement.
A Roth IRA provides that tax-free retirement income stream that appeals to seniors now and to workers planning for their senior years. Retirees have the option of passing their Roth IRA contributions to beneficiaries as a tax-free inheritance.
Several factors make a difference in whether seniors choose to take tax deductions now through a Traditional IRA or taking tax-free IRA withdrawals later from a Roth IRA. It is an individual decision, based on your circumstances.
Both traditional and Roth IRAs offer good estate-planning tools. Remember that all Individual Retirement Accounts have the same annual deadline. Contribute to a traditional or Roth IRA up to the last annual income tax filing date, which is traditionally April 15 of each year.
Seniors and IRA Decisions
Are seniors fully aware of the general information, benefits and potential penalties involved with Individual Retirement Accounts? Statistics show that seniors are not fully armed with the information that allows them to make the best IRA decisions.
A TIME Money writer calls IRAs the “New frontier” of the generation gap, citing the fact that the older an individual is, the more likely that individual is to favor a traditional IRA over a Roth IRA. Dan Kadlec suggests that when considering an IRA that seniors take a step back and look at IRA trends among younger IRA investors.
While 24 percent of older Roth IRA investors are over age 60, nearly one-third of younger investors make contributions to a Roth IRA. The Investment Company Institute also determined that while 39 percent of traditional IRA investors are over the age of 60, just 15 percent of individuals under age 40 make contributions to a traditional IRA.
One suspected reason for the higher rates of seniors contributing to traditional IRAs is the fact that many seniors roll over assets from their 401k into a traditional IRA.
A Roth IRA allows seniors the opportunity to shelter assets in the tax-free IRA option, while a traditional IRA offers the ability to receive an immediate tax deduction and grow the money in a traditional IRA tax-deferred option. Seniors also have the option of donating a required IRA distribution of up to $100,000 to qualifying charities.
Pay close attention to required withdrawal dates if you choose a traditional IRA because you want to know how the first and second required distributions potentially affect your tax bill.
Remember that you can no longer contribute to a traditional IRA after age 70 ½ and that while Roth IRAs offer seniors tax-free withdrawals, some seniors still prefer a traditional IRA. Roth IRAs also do not count towards determining if your income reaches the amount to charge you a higher Medicare premium. There are limitations, based on your filing status each year and your annual income.
Seniors do have options for IRA contributions as they get older and reach retirement. Make sure you review all your IRA options and make the decision that best suits your situation and retirement goals.