Should Older Workers Contribute to IRAs?

May 12, 2022
3 ways to keep saving.

Older workers with earned income—including those who've already started taking required minimum distributions (RMDs)1 at age 72—can make contributions to tax-deferred traditional IRA accounts. 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," says Hayden Adams, CPA, CFP®, director of tax and financial planning at the Schwab Center for Financial Research. For example, contributing could make sense if you want to:

1. Lower your taxable income

If you earn less than $78,000 in 2022 ($129,000 if married) or don't have access to a workplace retirement plan, you may be able to deduct traditional IRA contributions, thereby reducing your taxable income for the year (up to the annual contribution limit of $7,000 for those ages 50 and older).

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—$144,000 for individuals in 2022, $214,000 if married—you may be able to make after-tax contributions to a traditional IRA and then convert the funds to a Roth IRA.2 "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 says. "Plus, such accounts aren't subject to RMDs."

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

Required minimum distributions (RMDs) must be taken each year beginning with the year you turn age 72 (70½ if you turn 70½ in 2019).

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. 

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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.

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.

Roth IRA conversions require a five-year holding period before earnings can be withdrawn tax free and subsequent conversions will require their own five-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.