Retirement savings make up more than one-third of U.S. household financial assets, according to the Investment Company Institute. Americans hold about $4.2 trillion of this wealth in Individual Retirement Accounts, as of June 2010. While you can continue contributing to an IRA in retirement, the type of account determines how long you can continue to contribute.
The IRS, whether you continue to work or not, classifies you as retired once you turn 59 1/2 years of age for Individual Retirement Account purposes. At this age, you generally can begin withdrawing IRA money without fear of a 10 percent IRS tax penalty on premature withdrawals. As far as contributions go, you can make them to both Roth IRAs and traditional IRAs in retirement; however, the IRS does not allow traditional IRA contributions after you turn 70 1/2.
Prior to age 50, the IRS allows you to contribute a maximum of $5,000 to all of your IRAs combined. Once you turn 50, however, the IRS increases that limit to $6,000 annually, as of January 2011. Refer to IRS Publication 590 or consult your tax adviser to discuss your specific situation. Your income might prohibit you from contributing, fully or in part, to a Roth IRA. A combination of factors, primarily income and whether a workplace retirement covers you or your spouse, determines your eligibility to deduct traditional IRA contributions from your taxable income.
Consider your tax bracket when determining whether to contribute to an IRA in retirement. Because the IRS allows you to deduct traditional IRA contributions from your taxable income, you might benefit from doing so if your tax bracket in retirement is higher than when you were working. With a Roth, you do not receive the tax deduction, but you can withdraw your money tax-free in retirement. If you have a lower tax bracket in retirement, padding a Roth account might make more sense if you plan to access it before you die.
While you can contribute to IRAs in retirement, you must halt contributions to traditional IRAs in the year you turn 70 1/2 and for every year after. Roths do not have this restriction. In addition to the moratorium on contributions, the IRS also forces traditional IRA holders to begin taking required minimum distributions (RMDs) from each of their traditional IRAs annually, beginning with the year they turn 70 1/2. If you fail to take an RMD--which the IRS bases on your age, account value and life expectancy--in a given year, the IRS charges a 50 percent tax on the amount you failed to take.