Q Dear Rick:
I am 73 years old, retired and collecting a pension. My wife, on the other hand, who is about 10 years younger than me worked part time last year and earned about $18,000. Between the two of us we earned a little less than $100,000. The question I have deals with an IRA contribution for myself. My first question is since my wife worked am I eligible for an IRA contribution? We can use the deduction so I want to contribute to a traditional IRA . My second question is dealing with a Roth IRA conversion. Can I do a conversion even though I am 73?
A Dear Henry:
Unfortunately, even though your wife worked, you are not eligible for a tax deductible IRA. Once you are 70½ you are no longer eligible to contribute into a traditional IRA. However, there’s nothing in the rules to prevent you from contributing into a Roth IRA. The Roth IRA is not deductible, but it does give you a couple of advantages. The first is the fact that the money in a Roth IRA grows tax free, not tax deferred as it does in a traditional IRA. In addition, Roth IRA contributions are not subject to the minimum required distributions. Therefore, you can leave your money to grow income tax free for as long as you choose. With a Roth IRA, you are not required to take distributions. Therefore, the money can grow tax free for as long as you choose. In addition, if someone inherits a traditional IRA, they would pay income tax on the amount they are inheriting. That is not the case with a Roth IRA. When someone inherits a Roth IRA, there are no income tax consequences. In other words, all the money goes to them income tax free.
With regard to the question of Roth IRA conversions, your age is not a barrier. You cannot convert your required minimum distribution but you can convert anything above and beyond that. My general recommendation is if after converting, it will keep you in the same tax bracket, it could be a good move. On the other hand if it will put you into a higher tax bracket, then it probably is not a good idea.
I believe Roth IRA conversions are a valuable tool and something that more and more people should take advantage of. After all, the main advantage of doing a conversion is that you are taking money that is growing tax deferred and turning it into tax-free money. The other major benefit as I mentioned earlier is that there are no required minimum distributions on a Roth IRA and thus, you have much greater flexibility in dealing with your affairs.
One last note on Roth conversions, many people think you have to wait until the end of the year; that is not the case. Basically, you can do a Roth IRA conversion whenever you choose. The sooner you do a Roth conversion, the longer your money will grow tax free, not tax deferred.
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at email@example.com