retirement

Tax-Smart Ways to Save When You're Too Old for a Traditional IRA

Some workers may be too old to contribute to a traditional IRA.

I'm 72 years old and earn some money as a self-employed consultant. Can I contribute to an IRA and, if so, how much?

You can’t contribute to a traditional IRA starting in the year you turn 70½. But you can contribute to a Roth IRA at any age, and the money can grow tax-free in the account indefinitely (you don’t have to take required minimum distributions). To qualify for a Roth, your income in 2016 must be less than $132,000 if you’re single or $194,000 if you’re married and file taxes jointly.

You can contribute up to the amount you earned for the year (your net income from self-employment), with a maximum of $6,500 ($5,500 plus $1,000 for people age 50 and older). If your earnings are well over the $6,500 max, you can simply contribute that amount, but if they are close to 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, Individual Retirement Arrangements.

Or, because you are self-employed, you can contribute to a solo 401(k), says Rande Spiegelman, vice president of financial planning with the Schwab Center for Financial Research. You can deduct your contribution now and defer taxes on the money until it’s withdrawn. But because you’re over age 70½, you must take required minimum distributions from the solo 401(k). Employees usually don’t have to take RMDs from their current employer’s 401(k) if they’re still working at age 70½, but that rule doesn’t apply if you own 5% or more of the company. Because you’re self-employed and own the whole company, you’re stuck taking the RMDs.

For more information about solo 401(k)s, see Retirement Plans for Self-Employed Workers.

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