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IRA Tips for Later in Life

Christine Benz
Susan Dziubinski

Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar. This is the season when many investors fund their IRAs. You have until April 15 to make a contribution for the 2018 tax year. But if you are hurtling toward retirement, or already retired, should you make those contributions? Joining me to discuss this topic is Christine Benz, director of personal finance for Morningstar.

Christine, thank you for joining me today.

Christine Benz: Susan, it's great to be here.

Dziubinski: Now, an obvious question for older adults thinking about making IRA contributions is, is it really worth it? Is the tax deferral worth it when you are looking at a shorter time horizon?

Benz: Well, it's a really good point and you do want to think about that. The fact that you have a longer runway to benefit from the tax-deferred compounding does create some trade-offs because you may have to pull the money out at age 70.5 for required minimum distributions if it's a traditional IRA, and you may have some strictures on your money. So, I think it's important to consider that. But nonetheless, there is some opportunity to benefit from tax-deferred compounding.

One thing to keep in mind is whether you are doing a traditional or Roth IRA. So, if you are making a traditional IRA contribution, you are subject to those RMDs. So, say, you are age 60 and you are putting money into a traditional IRA, well, that's only a 10-year runway to benefit from that tax-deferred compounding before the money has to start coming out. On the other hand, if you are someone who is in the lucky position of not needing all of your money for retirement, so maybe you are mainly saving for your heirs at this point and you are putting money in a Roth IRA, which is not subject to required minimum distributions. There you have a longer runway for the tax-sheltered compounding. So, the advantages start to accrue if you expect that you will not need to pull your money out and spend it during retirement.

Dziubinski: So, overall, it sounds a little bit like a Roth contribution might have the advantage for a lot of people?

Benz: It does, but I think you want to keep in mind whether you are eligible to take a deduction on your contribution. If you are someone who is looking at your situation and thinking, well, realistically, I have not saved that much for retirement and I am able to make a deductible traditional IRA contribution, that may in fact be the better idea than saving within a Roth IRA.

Dziubinski: Let's go over the rules related to IRA contributions. For starters, if you are over age 70 1/2, you can't make a contribution to a traditional IRA, right?

Benz: That's right. And that makes sense, too, right? We talked about how required minimum distributions apply to those traditional IRAs. So, why would you want to make a contribution while you are simultaneously having to withdraw from the account. On the other hand, you can make a Roth IRA contribution at any age, but the key proviso is that you need to have earned income. Either you or your spouse needs to have enough earned income to cover the amount of your contributions. I sometimes talk to retirees who tell me, "Well, I continue to do some sort of contracting work specifically for this reason, because I want to continue to make Roth IRA contributions." But you do need to have earned income. Money that you are pulling from Social Security, money that you are pulling from your traditional IRAs does not count as earned income.

Dziubinski: Another thing you've talked about in the past is that you think it's important that you take advantage of catch-up contributions if you can, and you are making contributions in the first place.

Benz: Right. So, these allow people who are over age 50 to get additional assets in Roth IRAs. So, for people funding a 2018 IRA, the contribution limit is $6,500 if you are over age 50. It's ticking up a little bit for the 2019 tax year. You will be able to put $7,000 into an IRA if you are over age 50. Another thing to keep in mind if you are just turning 50 is that you don't have to wait until your birthday to start making those additional contributions. Jan. 1 of the year in which you will turn age 50 you are eligible for those catch-up contributions.

Dziubinski: What are some suggestions you have for how to invest if I'm over age 50 and I want to open up an IRA?

Benz: This is a good time to take a step back, look at what you already have in your portfolio. So, maybe you are someone who has spent most of your career saving within in the confines of a company retirement plan. Well, look at whether there are categories or asset classes where you want to add additional assets. So, maybe you've got a good 401(k) plan at work, but it doesn't have any inflation-protected bond exposure, for example, there's no choice in that category. Well, maybe that's a category where you use your IRA to kind of complete what's already in your 401(k). If, on the other hand, you want to use your IRA as kind of a stand-alone account, I think a target-date fund or a balanced fund or maybe a 70-30 type product like a Vanguard Wellington could be perfectly appropriate in that slot.

Dziubinski: Christine, as usual, a lot of great food for thought. Thank you very much for joining us today.

Benz: Susan, it's my pleasure.

Dziubinski: For Morningstar, I'm Susan Dziubinski. Thanks for watching.