Drawing Social Security & Paying Into an IRA

Just because you’re taking Social Security benefits doesn’t mean you have to stop working. If you are working, you can contribute to an IRA, although the type of IRA to which you may contribute is limited once you reach the age of 70 ½. That’s the age at which you must start taking required mandatory distributions, or RMDs, from your traditional IRA or 401(k) plan. However, since IRAs require earned income for contributions, your Social Security benefits per se don’t qualify you to contribute to an IRA.

If you plan to work after becoming eligible for Social Security, you must do some tax planning ahead of time. If you take your Social Security benefits before reaching your full retirement age, the IRS allows you to earn $17,040 annually as of 2018, or $1,420 per month, before penalties kick in. You’ll find your Social Security benefits reduced by $1 for every $2 you earn over this limit. However, if you wait until you reach full retirement age to collect Social Security benefits, there are no limits to how much you can earn.

Your full retirement age depends upon your year and month of birth. For example, someone born in 1956 reaches full retirement age at 66 years and 4 months. While a person can start taking benefits as early as age 62, that doesn’t usually make sense if he is still working since he will only receive 73.3 percent of the benefit he would receive if he waited until full retirement, and he is penalized if he earns over the current $17,040 maximum.

You must also consider the tax implications of Social Security and IRA distributions. When you begin taking RMDs from a traditional IRA, you are taxed at ordinary income rates. Much depends on where you live. There are states that don’t tax retirement income, including Social Security or IRA distributions, while others may tax the latter but not the former.

The good news is that you can continue to contribute to your employer’s 401(k) plan after taking Social Security even if you are past age 70 ½. You also are not required to take RMDs from your 401(k) if you are still working as long as you don’t own more than 5 percent of the company. If you are self-employed, you may contribute to a simplified employee pension IRA.

The same does not hold true for traditional IRA contributions. Once you are 70 ½, you can no longer contribute to this type of IRA. You can, however, roll funds from another kind of retirement account into your traditional IRA past the age of 70 ½.

If you’re working past age 70 ½, you can contribute to a Roth IRA as long as you meet the income limitations. Roth IRAs don’t have RMDs, and you don’t need to take distributions if you don’t wish to do so. Since Roth IRA contributions are made with post-tax dollars, they aren’t tax deductible, but withdrawals are tax-free as long as you are over age 59 ½ and the account has been open for at least five years. If you are over age 50, you may contribute up to $6,500 annually to a Roth IRA as long as you make that much from your job.

In 2018, a married couple filing jointly can both make Roth contributions as long as their adjusted gross income is less than $189,000. If their AGI is below $199,000, they can make a partial contribution, but an AGI exceeding $199,000 means they cannot contribute to a Roth IRA. Single filers can contribute the full amount to a Roth IRA if their AGI is less than $120,000, and a partial contribution is allowed if AGI is under $135,000. With an AGI of $135,000 or more, Roth contributions are not permitted.