Retired men and women of any age can open Roth individual retirement accounts, or IRAs. Unlike traditional IRA rules, which prohibit you from making contributions if you are older than 70 1/2 and require you to take distributions, you can contribute to a Roth IRA throughout your lifetime. However, the Internal Revenue Service requires you to fund a Roth IRA with compensation income, as opposed to investment or pension income.
Congress conceived of IRAs as a place where workers could put aside money for retirement in a tax-advantaged investment account. As such, the IRS requires owners to fund IRAs with compensation from specific sources, including wages, salary, tips or commissions earned from a job; self-employment income; military differential pay and combat pay; and alimony. The agency specifically prohibits you from contributing pension or investment income and rents you earn from a property.
Because Roth and traditional IRAs provide such enticing tax benefits, the IRS caps an individual's annual contributions. As of 2010, if you are over 50 you may contribute the lesser of your total compensation income or $6,000 to your Roth IRA. This means that if, in 2010, your earnings from a job and alimony payments totaled less than $6,000, you cannot contribute more than amounts you receive from these sources. If you received more than $6,000 from a job and alimony payments, you still may only contribute up to $6,000.
People often continue working in some capacity after retirement, living off a combination of pension and investment income, Social Security benefits and a job or even a small business. If you are retired but earn money through part-time work, contracting work or your own small business, your Roth IRA contribution cannot exceed the amounts you earn from these sources. You can also contribute amounts you receive as alimony.
For instance, consider that you had a pension that paid out $30,000 in 2010, and you earned $3,500 at a part-time job. In this scenario, you could only contribute income you earned from your job, as this is the only income source you have that the IRS considers compensation. Therefore, your Roth IRA contribution could not exceed $3,500 even though you received a total of $33,500, and the 2010 contribution limit was $6,000 for people over 50.
The IRS allows you to continue contributing to a Roth IRA throughout your lifetime because you pay taxes on your contributions; distributions, or withdrawals, are not taxed. This Roth IRA feature allows you to continue investing money in a tax-advantaged account to replenish or extend your retirement income as long as you keep working. It also allows you to wait for an ideal time to cash out your investments if the market is not doing well. Should you not use the assets in your lifetime, you can designate a beneficiary to inherit the account when you are gone. Your beneficiary cannot let the account sit indefinitely, but can take tax-free withdrawals.
Not only can you open a Roth IRA at any age, you may also make a rollover of traditional IRA funds into a Roth account. Doing so requires that you pay income taxes on the amount of the rollover, but your distributions will be tax free and you can avoid a traditional IRA's required distributions. If you are considering a rollover, consult a financial adviser who can advise you on the details. Whether or not a rollover will save you money depends on your situation.