fbpx

A Senior Citizens Guide to IRAs

Do you fit into either one of these buckets – no retirement savings and are over the age of 50, or older than 70.5 years of age and don’t believe you can contribute to an Individual Retirement Account (IRA) anymore? 

 

There are IRA’s which have been specifically designed for seniors so they are empowered with opportunities to both create and make contributions to an IRA. There are a variety of IRA options that fit with all kinds of senior’s needs and particular situation in life. Below outlines integral information about traditional IRA’s and Roth IRA’s – the two types available. 

A Basic Overview of Individual Retirement Accounts

Retirement years can come up in a hurry within one’s life, and seniors who didn’t financially plan properly earlier in their life can be left with limited savings to live off of when they put careers and work behind them. Retirement often seems so far down the road that people hold off on saving with intentions of doing so in a few years, but life happens and expenses can leave few dollars left to put away for the future. Many people don’t understand the power of IRA’s and investments until it’s too late, and they are left scrambling to build a nest egg so they can afford to leave jobs behind and enjoy some rest and relaxation. 

 

IRA’s were created so that people of all ages can reach their retirement money goals. These financial instruments were born in the 1980s, and they started out their journey with a Traditional IRA. The U.S. federal government added a Roth IRA option a few years later. 

What are the Differences Between the Two Types of IRA’s?

Traditional IRA

In order to qualify to contribute to a Traditional IRA – you must have earned income, and be a senior citizen who’s under the age of 70.5. April 1st the following year that you turned 70.5 years of age is when you have to start withdrawals on your account. Some important information to understand is that once withdrawals start coming from a Traditional IRA, monetary contributions can no longer be done. There are minimum distributions that are in place and must be taken to avoid a potential 50% excise tax on the amount – a steep price to pay. 

 

A Bankrate article was published, and in it, Amy E. Buttell articulated that if someone’s current income was on the higher side and it disqualified them from making contributions to a tax-deductible IRA or Roth IRA, that they open their mind to a non-deductible IRA. Any contributions that are allocated into a non-deductible IRA are not tax-deductible. A tax preparation professional offers services to deal with issues related to deductible and non-deductible IRA contributions, and income limit regulations. 

Roth IRA

A fantastic option for a good number of seniors are Roth IRA’s – these have many similarities to Traditional IRA’s, but a significant difference is that contributions are derived from post-tax earnings. The opportunity to make contributions after reaching that notable 70.5-year limit also exists, as no age limit has been put on this IRA type. 

 

Withdrawals are tax-free, no minimum contributions are required and Roth IRA’s can’t be tax-deferred. Tax-free distributions are provided as long as the account has been open for a minimum of five years, and customers need to be over the age of 59.5 before taking withdrawal number one. 

 

Money can be left in a Roth IRA by seniors for the rest of their life if they prefer. A nice attribute of making Roth IRA withdrawals is that they aren’t added to your income for the purpose of determining if your Social Security benefits are taxable. For seniors who are currently collecting benefits from the Social Security Administration – be rest assured that a Roth IRA won’t affect them.

 

Contributions are potentially limited by your filing status and income according to the IRS.  As a general rule – the more money you make on an annual basis, the less money you are allowed to contribute to your Roth IRA. You are advised to have a conversation with your tax professional or the IRS to learn more about Roth IRA’s, so you can fully understand any limitations and your responsibilities for owning one. 

Traditional vs Roth IRAs

So what type of IRA is ideal for seniors who are looking to retire in a few years? It depends to a large degree with one’s tax situation, and how IRA withdrawals will impact his or her tax rate says Kimberly Langford – a Kiplinger contributing editor. 

 

Purchasing a Traditional IRA can potentially bring the future reality of relying on a significant amount of money in withdrawals once retirement arrives, and this money can bring on a higher tax rate and keep less money in your bank account. 

 

A Roth IRA makes a lot of sense as it provides tax-free retirement income to live on, and seniors can also pass down their Roth IRA contributions to their beneficiaries as a tax-free inheritance when they pass away.  

 

There are a few considerations that have to be thought about before electing to take tax deductions now through a Traditional IRA, or taking tax-free withdrawals down the road from a Roth IRA. It depends on a senior’s short and long-term plans on what the ideal plan of action should be. 

 

Estate-planning tools are important to seniors and both of these types of IRA’s have them. The deadline is the same for all IRA’s on an annual basis, and contributions can be made up until the last income tax filing date – usually April 15th each year.

Seniors and IRA Decisions

Seniors need to be well enamored with the key information required to make proper IRA decisions, but unfortunately, most aren’t. Benefits, potential penalties, taxation, and other elements need to be closely examined before committing to an IRA. 

 

A Traditional IRA tends to be favored by seniors over a Roth IRA, especially the older someone is. In fact, a TIME Money writer boldly stated that IRA’s are the “new frontier” of the generation gap. IRA trends by younger IRA investors should be studied by seniors according to Dan Kadlec, to learn how their’s can be maximized according to modern approaches. 

 

Some stats from The Investment Company Institute – 24% of Roth IRA investors are more than 60 years of age, and younger investors who make contributions to a Roth IRA is almost 33% – or a shade under one third. 39% of Traditional IRA contributions are by people above 60, and those who are less than 40 years of age have just 15% of this younger group allocating money into a Traditional IRA. 

 

One theory as to why seniors are more likely to contribute money into a Traditional IRA versus younger demographics is that seniors are rolling over assets from their 401k to this particular IRA type. 

 

Sheltering assets in the tax-free Roth IRA is offered to seniors, and a nice aspect about a Traditional IRA is gaining an immediate tax deduction to grow the money by going in this direction. If you are generous and into donating money to charities – a distribution of up to $100,000 can be done through an IRA to charities that qualify to receive these funds. 

 

Traditional IRA investors need to understand when required withdrawal dates are in effect, as the first and second required distributions can affect how much tax money needs to be paid to the government. 

Some Key IRA Points to Keep In Mind

 

  • Traditional IRA’s are no longer open for contributions from those who are over the age of 70.5

  • Roth IRA’s offer seniors tax-free withdrawals, but it still might make more sense to buy into a Traditional IRA – talk to a tax professional for a firm opinion 

  • IRA contributions bring options for seniors as they age and get into their retirement years

  • Higher Medicare premiums aren’t affected by Roth IRA activity 

  • There are IRA limitations depending on one’s filing status each year and annual income

  • Closely examine IRA options before making a decision on settling on one – your retirement goals and current situation are two important factors that need to fit with an IRA

Scroll to Top