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Can I add money to my IRA after I retire?

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You've been saving for retirement for decades. The time is just about here for you to leave your working days behind and start relying on your individual retirement account (IRA) and other investments. But now you may be wondering: Can I add money to my IRA after I retire? After all, you've likely been stashing away extra money with contributions for so long that it's a habit. The short answer is yes, you may be able to add money to your IRA if you or your spouse has earned income. However, there are a few qualifiers and limitations. Let's find out more.

General rules for post-retirement IRA contributions

Before 2019, you couldn't make contributions to a traditional IRA after age 70½. That changed with the SECURE Act, which eliminated the age limit. Now the main rule for contributing to your IRA, whether traditional or Roth, after you've retired is the same for everyone—you or your spouse just need to have earned income during that year.

These are the key points to know:

  • Income that qualifies as "earned" includes wages, salaries, tips, bonuses, commissions and earnings from self-employment.
  • Money that does not count as earned income—and therefore can't be put in an IRA—includes dividends, interest, capital gains and distributions from retirement accounts.
  • Contributions are limited to 100% of your earned income or the maximum annual IRA contribution, whichever is less.
  • Roth IRA contribution limits apply depending on your modified adjusted gross income.

Note that you can contribute to an IRA in retirement even if you've started collecting Social Security benefits. But keep in mind that what you get from Social Security does not qualify as earned income, and therefore can't be contributed to an IRA.

How much can a retired person contribute to an IRA?

The maximum amount a person can contribute to a traditional or Roth IRA for 2022 is $6,000 if they're younger than age 50. Those who are 50 or older can put in an extra $1,000 catch-up contribution.

That means that retirees, who tend to be older than 50, can usually contribute up to $7,000 per year. But, as noted before, you also can't contribute more than 100% of your annual earned income to an IRA regardless of whether you're retired or not. For example, let's say you're retired, but you took on a part-time job that paid you $5,000 over the course of the year. Your annual IRA contribution, presuming that was your only earned income, would then be capped at $5,000.

You can make an IRA contribution if you or your spouse have earned income. However, if you or your spouse are participants in an employer sponsored retirement plan, your income has to be below certain modified adjusted gross income (MAGI) limits in order to deduct the contribution. In order to contribute to Roth IRAs, your contribution amount is also dependent on your MAGI.

Roth IRA income limits for 2022

  • Single taxpayers: Full contributions are allowed if your MAGI is below $129,000. Partial contributions are allowed up to $144,000.
  • Married filing jointly: Full contributions are allowed if your MAGI is below $204,000. Partial contributions are allowed up to $214,000.
  • Married filing separately: Only partial contributions are allowed up to $10,000.

Traditional IRA income limits for 2022

  • Single taxpayers: Full contributions are allowed if your MAGI is below $68,000. Partial contributions are allowed up to $78,000.
  • Married filing jointly: Full contributions are allowed if your MAGI is below $109,000. Partial contributions are allowed up to $129,000. Higher limits, which range from $204,000 to $214,000, are allowed for taxpayers who are not covered by a workplace retirement plan but are married to someone who is.
  • Married filing separately: Only partial contributions are allowed up to $10,000.

Note: These MAGI limits only apply to deductibility of contributions if the IRA owner or spouse are covered by an employer retirement plan.

Comparing Roth IRAs vs. traditional IRAs in retirement

It's established that retirees with earned income can contribute to an IRA. But which is best for retirees—a Roth IRA or a traditional IRA? The potential tax-free withdrawals offered with Roth IRAs are an attractive benefit, but some people may benefit more from the tax-deductible contributions involved with traditional IRAs. Here are the main points to consider:

  • With a Roth IRA, contributions are made after income tax is taken out, and your withdrawals are generally tax-free. Since many retirees don't have as much taxable income as they did in their pre-retirement years, a Roth IRA may be an ideal choice.
  • With a traditional IRA, generally contributions are made before income tax is taken out, but withdrawals are taxed as income. A traditional IRA can be a good choice for retirees who have a need for reducing their taxable income.

What are the pros and cons of post-retirement IRA contributions

While it may seem like a good idea to keep saving money in retirement, it's wise to first consider the advantages and disadvantages before adding money to an IRA after you retire.

Pros

  • Tax benefits. Taxes can continue to be a significant expense after retirement, and an IRA can help to reduce tax costs. Investment earnings grow tax deferred while held in IRA, and withdrawals from a Roth IRA are generally tax-free if the account has been open for at least five years after age 59½. Contributions to a traditional IRA can also reduce taxable income, which some retirees consider a big benefit.
  • Growth potential. Since IRAs have tax-deferred growth and a range of investments like stocks, bonds and mutual funds, an IRA can be a great tool to continue growing wealth in retirement.
  • Build retirement savings. Although you may already have sufficient savings, building a larger nest egg can provide greater financial security.

Cons

  • Taxation. Although IRAs have tax benefits such as tax-deferred growth, they may also have tax consequences. For example, withdrawals from a traditional IRA are taxed as income, and required minimum distributions must begin no later than April 1 following the year you turn 72. If you delay distribution to this date, you would also be required to take a second distribution in that calendar year.
  • Risk of loss. If you invest in stocks, bonds or mutual funds, it's possible your account value will decline in value below your original investment amount. This kind of risk, called principal risk, is generally not suitable for a retired investor who needs immediate income.
  • Less liquidity. Money invested in an IRA can take a few days for funds to settle after selling shares of an investment. This means access to cash is not as easy compared to a deposit account at a bank.

Other tips for saving money while in retirement

Many people assume retirement savings will end after you retire, and that that's when you're supposed to begin taking Social Security benefits, a pension (if applicable) and withdrawals from your savings and investments. But saving money for reasons other than income is still important in retirement:

  • Maintain an emergency fund. Emergencies can still happen and may even be more likely in retirement. A general rule is to have three to six months of living expenses stashed away. Review your budget and make sure you have cash on hand for everyday expenses as well as unexpected ones. Keep in mind your potential exposure to risk, such as missing gaps in Medicare or temporary declines from a market correction in your investment accounts.
  • Keep some money liquid. Emergency funds and money needed for everyday expenses should be kept in a highly liquid account, such as a checking or savings account. This provides quick access when you need it and prevents you from using debt or withdrawals from investments for short-term needs.
  • Consider high-yield bank accounts. For money you don't need immediate access to, consider keeping it in a savings account or a certificate of deposit with the best interest rate available.
  • Think about expanding your investments. If you are fortunate enough to have more income than you need in retirement, you may want to think about adding investment accounts, such as an IRA or brokerage account.

The bottom line

Let's return to the original question: Can I add money to my IRA after I retire? The main qualification needed for adding money to an IRA after you retire is earned income—which includes money you make from working at a job. Earned income does not include money from sources like Social Security, a pension or an investment distribution.

After confirming that you qualify to make contributions to an IRA in retirement, you may need guidance about how much you can contribute or help weighing whether a Roth or traditional IRA is better for you. Since there are many factors involved with these decisions, it can be well worth the time to speak to a local financial advisor before adding money to an IRA in retirement.

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Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.
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