Can I Open an IRA if I'm Retired?
You can contribute to a Roth or Traditional Individual Retirement Account, commonly called an IRA, after you retire, provided that you have a source of income that the Internal Revenue Service deems "compensation"-- usually, money you earn from a job or small business. Additionally, IRS rules prevent you from making Traditional IRA contributions beginning the year you turn 70 1/2.
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Function
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Congress designed IRAs to help working people put aside money for retirement, rather than use the accounts as a tax shelter for inherited wealth or investment income, for instance. Each year, the IRS sets Roth and Traditional IRA contribution limits; as of 2010, your contributions cannot exceed $5,000 if you are under 50, and $6,000 if you are 50 or older. However, the agency also stipulates that your annual contribution cannot exceed the amount of income you received as compensation if the amount is less than the maximum contribution limit.
Compensation
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The IRS defines compensation as wages or salary you earn from a job, as well as tips, commissions and self-employment income you earn as a small business owner or independent contractor. Additionally, the IRS allows you to contribute amounts you receive as alimony, military differential pay and nontaxable combat pay to an IRA. Its guidelines specifically prohibit you from contributing pension, annuity and interest income, as well as income you receive from a property or certain types of business partnerships.
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Significance
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There are several scenarios where you can make an IRA contribution after you retire. If you retired but took a part-time job, you can contribute amounts you earn to an IRA. Similarly, if you operated a small business or did consulting work as an independent contractor, you can contribute to an IRA. You can also contribute money you receive as alimony. Note that your contributions cannot exceed amounts you receive from these sources. For instance, if you are 60 years old, retired and receive $50,000 annually in pension and investment income, but earn only $3,000 from a part-time seasonal job, you can only contribute $3,000.
IRA Types
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The IRS allows you to contribute to a Roth IRA regardless of your age. You don't get a tax break for contributions, but withdrawals are tax-free. You can keep putting money into your Roth IRA, and never make a withdrawal for as long as you live.
Traditional IRAs function differently. You get a tax write-off for Traditional IRA contributions, but pay income taxes on withdrawals. Therefore, the IRS wants you to begin taking withdrawals eventually. To this end, Traditional IRA rules require you to cease contributing to a Traditional IRA and begin making withdrawals the year you turn 70 1/2.
Roth IRA Benefits
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Because Roth IRA rules allow people to delay withdrawals indefinitely, many people use them as an estate planning tool to pass tax-sheltered assets to their heirs. Heirs do not receive all the benefits that original owners get, they are required to being taking withdrawals shortly after they inherit the account. However, distributions are tax-free (provided that estate taxes do not apply), and heirs are free to buy and sell assets inside the Roth IRA as long as it retains wealth. If you plan to leave your Roth IRA to a beneficiary, continuing to make contributions into retirement is a smart way to accumulate wealth for your loved ones.
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References
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