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.
Dan Ketchum has been a professional writer since 2003, with work appearing online and offline in Word Riot, Bazooka Magazine, Anemone Sidecar, Trails and more. Dan's diverse professional background spans from costume design and screenwriting to mixology, manual labor and video game industry publicity.