The federal government instituted individual retirement accounts (IRAs) to help people save for retirement. However, depending on your age and income sources, you may still be able to start an IRA during your retirement years to take advantage of the tax breaks offers by IRAs.
Only taxable compensation earned in the year you want to make a contribution counts toward making you eligible to contribute to an IRA of any type. If you do not have compensation, such as wages, bonuses or self-employment income, you cannot make a contribution to an IRA. This requirement is particularly challenging if you are retired because you cannot use investment earnings, interest or pension plans to qualify you to contribute to an IRA, even if the money is taxable.
Age Limits for Roth IRAs
Traditional IRAs restrict who can contribute to the account based on your age. If you turn 70 1/2 years old before the end of the calendar year, you cannot start or make a contribution to a traditional IRA. This age limit does not apply to Roth IRAs, so even if you are 90, if you meet the other requirements, you can still open a new Roth IRA.
Roth IRA Conversions
When you are retired, you can open a Roth IRA and fund it with a conversion even if you are not otherwise eligible to contribute to a Roth IRA. Doing so allows you to avoid required minimum distributions in future years. However, you cannot roll over minimum required distributions for a given year. For example, if you have to take a minimum required distribution of $20,000, you could roll over the remainder of your account into a new Roth IRA, but that $20,000 would have to be distributed.
Roth IRA Considerations
Unlike traditional IRAs which only require you to be 59 1/2 years old, Roth IRA impose an additional requirement: the Roth IRA must be at least five tax-years old before you can take qualified distributions. If you are just starting a Roth IRA, you will have to wait before you can take distributions, even though you might already be 59 1/2. Depending on your age in retirement, that might push back the time for qualified distributions beyond your life expectancy.