Should Older Workers Contribute to IRAs?

February 1, 2024
There are no age restrictions on IRA contributions. But does it make sense for older workers to make contributions as they near retirement? Here are three points to consider.

Older workers with earned income—including those who've already started taking required minimum distributions (RMDs) at age 73—can make contributions to tax-deferred traditional IRAs. But does it make sense to do so?

"Under the right circumstances, contributing to an IRA as an older worker can complement your tax strategy," said Hayden Adams, CPA, CFP®, director of tax and wealth management at the Schwab Center for Financial Research. For example, contributing could make sense if you want to:

1. Lower your taxable income

If you meet certain requirements, you may be able to deduct traditional IRA contributions, thereby reducing your taxable income for the year (up to the 2024 annual contribution limit of $8,000 for those ages 50 and older).

If you—and your spouse—are not offered a retirement plan by an employer, then you're eligible to deduct the full amount of your traditional IRA contributions, up to the contribution limit. However, if either of you participates in a workplace retirement plan, your deduction phases out depending on your filing status and income.

If your deductible contributions reduce your income to less than $25,000 ($32,000 if married), you can even avoid having your Social Security benefits taxed. (Admittedly, this is quite a low ceiling and may not be possible for retirees with significant savings.)

2. Benefit from a lower tax bracket in retirement

Making tax-deductible contributions to a traditional IRA now, if eligible, allows you to defer paying taxes until you're in a potentially lower tax bracket in retirement. This could be especially advantageous for workers who expect to retire in the next few years and want to beef up their savings before they leave the workforce.

3. Perform a backdoor Roth conversion

If your income exceeds Roth IRA contribution limits—$161,000 for individuals in 2024, $240,000 if married—you may be able to make after-tax contributions to a traditional IRA and then convert the funds to a Roth IRA. However, the IRS' pro rata rule requires that you include all your IRA assets—meaning those funded with pretax (deductible) contributions and those funded with after-tax (nondeductible) contributions—when calculating the conversion's taxes. "Once you're 59½ or older and have held the account for five years, you can withdraw contributions and earnings from a Roth totally tax-free," Hayden said. "Plus, such accounts aren't subject to RMDs, giving you more flexibility in your retirement cashflow and potentially limiting your overall tax liability."

"Older workers have a fair number of saving options now," Hayden continued, "so it's wise to work with a financial planner or tax professional to determine how best to achieve your retirement goals."

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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Investing involves risk, including loss of principal.

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.

Supporting documentation for any claims or statistical information is available upon request.

Roth IRA conversions require a 5-year holding period before earnings can be withdrawn tax free and subsequent conversions will require their own 5-year holding period. In addition, earnings distributions prior to age 59½ are subject to an early withdrawal penalty.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.