Many people dream of retiring as soon as possible, only to realize once they have reached their goal that they may be drawing on their savings for a long time. The average American now has a life expectancy of around 80 years. So if you retire at age 65, your savings will need to last 15 years on average. Although IRAs were created to help workers save for retirement, you may want to continue saving money in a tax-advantaged account while you are retired. You may still be allowed to start one, but it will depend on the type of IRA you wish to open, the source of your income, and your age.
There is no age limit for starting a Roth IRA and making contributions to the account. With a Roth IRA, you pay taxes on the money before you make the contribution, therefore all withdrawals are tax-free. But there is an age limit of 70 1/2 for opening a traditional IRA. People with traditional IRAs receive a tax deduction for IRA contributions and pay taxes at their ordinary income tax rate on all withdrawals. Anyone with a traditional IRA is required to start making minimum withdrawals from the account so that the government can finally begin receiving tax revenue on money that has been compounding tax-deferred over the years.
Retired people have a major hurdle to cross when it comes to starting either a Roth or traditional IRA. Federal rules require IRA owners to make contributions to the accounts with earned income, which defeats the whole concept of retirement. The money retired people put into the IRA cannot come from investment income or pension plans. Retired people who want to start an IRA would need to report income to the IRS that comes from wages, bonuses or some form of self-employment.
Non-working spouses get a free pass on the earned income rule -- as long as the working spouse reports enough earned income to equal any contributions the working spouse makes to both IRAs owned by the couple. Still, the retired couple can only contribute (for tax year 2012) up $5,000 each per year to the IRAs or up to $6,000 each if they are both age 50 or older.
Roth IRA Restrictions
Retired people who start a Roth IRA must be prepared to wait five years to withdraw the money, even if they are older than 59 1/2. Traditional IRAs allow account owners to make withdrawals without penalty after age 59 1/2. But the Roth IRA imposes an additional rule. Qualified withdrawals from a Roth IRA also cannot be made until after five years of opening the account without getting hit with a 10 percent penalty. The penalty would apply only to the earnings on the money retirees have put in, which would have been tax-free if they waited until after age 59 1/2 and the account was 5 years old. Retirees need to consider their own age and health to determine if starting a Roth IRA is worth the five-year wait.
Tim Grant has been a journalist since 1989 and has worked for several daily newspapers, including the Charleston "Post & Courier," the "Savannah News-Press," the "Spartanburg Herald-Journal," the "St. Petersburg Times" and the "Pittsburgh Post-Gazette." He has covered a variety of subjects and beats, including crime, government, education, religion and business. He graduated from The Citadel with a Bachelor of Science in business administration.