Contribute to a Retirement Plan After Age 70-1/2?

By Allen Ostrofe
Originally published in The Union on March 20, 2016. Download the PDF.

Burt and Alice consider themselves “New Age” business people. 

They were an American success story, having started a business in their garage over 40 years ago. Their now technologically-advanced retail/wholesale firm, dealing with healthcare products, is generating gross revenues well in excess of $1 million a year. 

They have enjoyed stable growth, a stable staff, and have been systematically saving through their 401(k)s and IRAs each year. They saved, believing that our Social Security program might run out sometime during their lifetimes. 

Both turn 70-1/2 this year. They knew they NOW had to start drawing from their 401(k)s and IRAs through something called a “Required Mandatory Distribution.” 

That worried them. 

Would they now lose their best means to save and contribute on a tax-deferred basis, just because they are turning 70-1/2? They thought, we still feel “young” and still enjoy working. That’s not fair! 

Burt and Alice called from Santa Rosa, California, looking for a solution to this dilemma. Their case is not unusual at all. For many, age 70-1/2 is the NEW age 65. Many live longer, healthier lives, and are still interested (and able) to work in a sector where they can share great wisdom. 

Should you find yourself working past age 70-1/2, you are probably either trying to seal a crack in your nest egg, or you are one of those people who will only be ready to retire when they wheel you out in a redwood box. 

In the year you turn 70-1/2, the tax system seals the lid on traditional IRA contributions and opens the spigot on your retirement accounts, in the form of required minimum distributions (RMDs). 

When you continue to earn wages, but pull out RMDs, the tax consequences can result in higher tax rates and an increased percentage of your Social Security benefits being subjected to taxes. Should you stop working? Not necessarily. 

As long as you are still working past the age of 70-1/2, and have enough taxable compensation (e.g., self-employment wages, salaries, fees, tips, bonuses, commissions, taxable alimony) to cover your retirement contributions, you may still contribute to a Roth IRA (not a traditional IRA). 

Note, for married couple filing jointly, you start to lose your ability to contribute to a ROTH when you reach a “modified adjusted gross income” (MAGI) of $184k, and you may no longer contribute to a ROTH when your MAGI exceeds $194k. 

You may also still contribute to a 401(k) plan. And, as long as you own less than 5 percent of the business you are working for, you are not even required to take RMDs (n.b. ownership above 5 percent requires taking the RMDs, but the tax-deferred contributions still make good sense since they will not be taxed until a later date). 

Burt and Alice could each lower their taxable income by contributing $24,000 to their 401(k)s, and get further taxfree growth by each contributing $6,500 to a ROTH: a double tax benefit they never expected! 

Now that we were able to resolve the after 70-1/2 contribution’s issue, we moved on to the next important issue for Burt and Alice. 

They’d spent years in building a successful business, but hadn’t taken the time to design a succession plan to ensure the continuity of that business. Should any of these subjects touch your circumstances, see your Certified Financial Planner® immediately.

The information provided is general in nature and should not be construed as comprehensive financial advice. As with any financial matter, please consult with your qualified financial professional before taking any action. Allen Ostrofe, MBA, CFP®, Accredited Investment Fiduciary® is President of Ostrofe Financial Consultants, Inc., a S.E.C. Fee-based Registered Investment Advisor. Securities and Advisory Services offered through National Planning Corporation (NPC), member FINRA/SIPC, a Registered Investment Advisor. Ostrofe Financial and NPC are separate and unrelated companies. For questions or suggestions, visit Branch address: 565 Brunswick Road, Ste. 15, Grass Valley.