Can Retired People Start an IRA?

Can Retired People Start an IRA?
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Individual retirement accounts (IRAs) are effective means for investing toward those years when people become, by choice or by circumstance, less economically productive. In a traditional IRA, working people contribute a portion of their wages and other income to the account on a tax-free basis. As interest accumulates, the IRA becomes a significant nest egg from which to draw, at which time the revenue is subject to taxation. A Roth IRA works oppositely – the contributed money is taxed while the withdrawn funds are not.

These retirement accounts have served many retirees well since their inception in 1974 for the traditional IRA and 1997 for Roth IRA.

What If I Am Already Retired?

Would a bank, credit union or other financial institution open an IRA for someone already retired? First, "retired" is a fluid term with multiple meanings.

A retired military or police officer may go on to work a job in the private sector even though her primary career is at an end. Other retirees may continue to work part-time or maintain businesses of their own. For example, a retired school teacher may go into real estate sales, sometimes making more money and working more hours than before. So, the first question to ask is whether the retiree is actively earning income.

Another piece of the puzzle used to be the age of the retiree. For a traditional IRA, if an applicant would pass 70 1/2 before the end of the calendar year when the application is made, he or she would in most cases be ineligible. However, this was changed in 2020 so there's not an age limit for traditional or Roth contributions.

What matters here is the first concern: just how "retired" are you? Can you contribute fresh funds to this account on a regular basis? This involves the concept of "earned income."

What Constitutes Earned Income?

Earned income implies some sort of work, either for another or for one's self. Most retirees do not dig ditches, but many work part-time in grocery stores, as crossing guards or as playground supervisors at schools. Alternatively, they may run some type of multi-level marketing business, own a Christmas tree farm or write for the local newspaper. The list is long.

Perhaps easier is to talk about what is not considered earned income. Such revenue includes non-taxable alimony and child support payments, Social Security retirement benefits and unemployment compensation. These are general guidelines, and each institution may enumerate specific allowances and prohibitions.

These guidelines might raise some interesting financial and philosophical questions. A sound argument could be made that Social Security, unemployment insurance and other safety-net payouts were paid into over a lifetime of labor, sweat and overtime.

Adherents to this position will object to banks excluding them from IRA contributions. On the flip side, such sources, it may be argued with similar assurance, were established for narrow purposes, i.e. to be applied to basic expenses following a layoff, retirement or when work is no longer possible. Therefore, investment should be forbidden using monies from such supplies.

Limits Do Not Change for Older Investors

In general, annual contribution limits stand at ​$6,000 f​or those younger than 50 years of age. For those at the half-century mark and above, the maximum allowable contribution is ​$7,000​ per year. Needless to say, people who open IRAs in their 60s, 70s or older are restricted to $7,000 contributions each year.

Unfortunately, the fact that they are starting an IRA later in life does not afford them any waivers as to that contribution ceiling. The good news is that they can make some headway in growing their savings.