When are Required Minimum Distributions Required?

Putting money in piggy bank“Some workers may be too old to contribute to a traditional IRA.”

Kiplinger’s recent article, “Tax-Smart Ways to Save When You're Too Old for a Traditional IRA,” reminds us that you are not allowed to contribute to a traditional IRA starting in the year you turn 70½. Nonetheless, you’re still able to contribute to a Roth IRA at any age. That money can grow tax-free in the account indefinitely, and you don’t have to take required minimum distributions (RMDs).

To qualify for a Roth IRA, your income in 2016 has to be less than $132,000 if you’re single or $194,000 if you’re married and file taxes jointly.

You can contribute up to the amount you earned for the year (your net income from self-employment) with a maximum of $6,500—that’s $5,500 for everyone under age 50, plus $1,000 for people age 50 and older. If your earnings are well over the $6,500 maximum, you can just contribute that amount. However, if your earnings are near or under the maximum, you’ll need to know what is considered compensation and how to calculate your allowed contribution.

For that information, see IRS Publication 590, Individual Retirement Arrangements. It notes that starting in 2015, you can make just one rollover from an IRA to another (or the same) IRA in any one-year period—regardless of the number of IRAs you own.

You can continue to make unlimited trustee-to-trustee transfers between IRAs because it is not considered a rollover. In addition, you can also make as many rollovers from a traditional IRA to a Roth IRA (known as “conversions”).

And if you’re self-employed, you can contribute to a solo 401(k), deduct your contribution now and defer taxes on the money until it’s withdrawn. However, since you’re over age 70½, you are required to take required minimum distributions from the solo 401(k).

Employees usually don’t have to take RMDs from their current employer’s 401(k) if they’re still working at age 70½; however, that rule doesn’t apply if you own 5% or more of the company. So if you’re self-employed and own the whole company, you’ll be stuck taking the RMDs.

Reference: Kiplinger (August 19, 2016) “Tax-Smart Ways to Save When You're Too Old for a Traditional IRA”

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