In order to set up or contribute to any IRA, Roth or traditional, you must have earned income. A retiree who does not have earned income is still free to convert assets in a pre-tax retirement plan like a traditional IRA, 401k or 403b to a Roth IRA, though it might not be the best move tax-wise. You should consult with a financial advisor to determine if such a move is right for you and your estate plan.
Earned income is wages, salary, tips, bonuses or professional fees. Social Security, income from a retirement plan and investment income are considered passive income and don't count. A retiree who has earned income, no matter how little, can set up and contribute to a Roth IRA. Until 2010, there was a $100,000 income limit for converting to Roth IRA. That limit is now eliminated, and anyone can convert to a Roth no matter what their income.
Virtually any investment provider – including banks, mutual fund companies, insurance companies and brokerage firms – will help a retiree convert to a Roth IRA. This process entails only a few simple forms. Each provider determines minimum initial investments, associated fees and investment options. J.D. Roth, author of “Your Money: The Missing Manual,” recommends saving a separate emergency fund and eliminating credit card debt before converting to or opening a Roth IRA.
While standard IRAs bar contributions by those over 70 1/2 years of age, Roth IRAs do not impose this limit. Likewise, Roth IRAs do not force retirees to begin withdrawing by age 70 1/2, so funds can continue to grow for the entire life of the account owner. A retiree with earned income could also continue contributing to his Roth IRA for the rest of his life and leave a tax-free legacy to his designated beneficiary.
Whenever you convert from a pre-tax plan to a Roth, which is after-tax, you must pay taxes on the conversion. Those who converted in 2010 got a one-time option to spread their conversion taxes over two years. For conversions in 2011 and later it reverts to the old rules, meaning you would pay taxes on a lump sum distribution. This could be a considerable amount for a retiree that could diminish the value of tax-free withdrawals or inheritance.
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