The simple fact that you are retired doesn’t mean you can’t contribute to an IRA. You can still contribute to an IRA if you are retired, but you need to have earned income. This is the same condition you had to satisfy before you retired.
Be careful though. Not all income is considered earned income for purposes of contributing to an IRA. More on that in a minute.
You’ve may have heard that you can’t contribute to an IRA once you start required minimum distributions. This scenario has changed since the SECURE Act went into effect on January 1, 2020. Age is no longer a factor.
What Exactly Do You Mean by Retired?
I’ve dealt with retirement long enough to know it means very different things to different people. To you it may mean that you aren’t working on anything other than home projects and your own hobbies. To some it means you aren’t punching the same clock you punched for thirty years. For others it means you switched careers and still work part-time. Or, to you it could mean you have a “job” but it’s one that you do primarily for enjoyment.
Why does it matter how you define retirement? Earned income.
You can only contribute earned income to an IRA. So if by retired you mean you are on the lake all day, everyday, then no, you probably can’t contribute to an IRA because you probably don’t have earned income. If you still have a part-time job and earn a paycheck then you have earned income.
What Qualifies as Earned Income for IRA Contributions?
There are two very simple ways to determine what earned income is. You either were paid for doing work for someone else, or you were paid for self-employment.
You’ll see this information on your W-2 if you received one. The most common will be wages and salaries.
If you are self employed, your earned income that qualifies for IRA contributions is the same amount as your net earnings from self employment.
Is Social Security Earned Income?
No. For purposes of being able to contribute to an IRA Social Security benefits do not qualify as earned income. Distributions from your retirement plans don’t either, but it seems circular that anybody would want to deposit that into an IRA anyway.
Of course, you very much earned both of these sources of income. So why are they not included? The simple answer is because they are specifically named in the list of items excluded from the definition of earned income.
Don’t worry though, you’ll still get to pay taxes on them.
What About Investment Income?
Nope. That doesn’t count either. Capital gains, interest, dividends, and rental income are all excluded as well.
What if I Have to Take Required Minimum Distributions? Can I still Contribute to an IRA?
If you have a traditional IRA you are required to take minimum distributions (RMDs) every year once you reach 72. The SECURE Act moved that from the previous 70 & 1/2.
Prior to 2020, you couldn’t contribute to an IRA once you reached 70 & 1/2 and started taking RMDs even if you had earned income. That’s the old rule though, and no longer in effect. Now, if you have earned income you are able to contribute regardless of age. That’s another big change the SECURE Act gave us.
Put those two together. This means that you can now contribute to an IRA for the same year that you are required to take an RMD. Don’t forget the rule though. In order to contribute to an IRA you have to have earned income. The contribution can’t BE the RMD since retirement plan distributions don’t count as earned income. The contribution would still have to come form separate earned income.