07 Feb Saving when you’re 70 1/2 and still working

Q. I am 70 years old and still working full time. I continue to contribute to my Roth and traditional IRAs, and my employer’s 401(k). I turned 70 ½ at the end of January 2018. I know that sometime during 2018 I will have to start taking RMDs. While taking an RMD from one account, can I contribute to other retirement accounts? Or do I have to take distributions from each account? Can I take from my Roth and traditional IRAs while continuing to contribute to my 401(k)?
— Full-Time Saver

A. It is good to know that you are still looking for ways to save in your retirement accounts while you continue to work.

Each of the accounts you have is slightly different when it comes to contributions and distributions, so let’s take them one at a time.

If you turned 70 1/2 in January 2018, you will need to take a Required Minimum Distribution, also known as an RMD, from your traditional IRA, said Claudia Mott, a certified financial planner with Epona Financial Solutions in Basking Ridge.

“The rule is that you must begin taking annual distributions in the year you turn 70 1/2,” she said. “For those born after July of 2018, this would mean their distributions would actually start in 2019.”

Your distribution will be based on the value of the account as of Dec. 31, 2017 divided by a life expectancy factor or an applicable distribution period, Mott said.

Once you begin taking distributions from your traditional IRA, you will not be able to make any further contributions, but you could roll over funds from another IRA or an employer plan, she said.

“Your payments will be considered taxable income and will be reported on your tax return,” Mott said. “Since you have been covered by a 401(k), it is likely that the contributions you have made to the traditional IRA have not been tax deductible.”

Hopefully you have kept track of what contributions were deductible and which were not because that will affect how much of the distribution needs to be reported as income. You’ll want to be sure to discuss this with your tax professional when it comes time to file your 2018 return, Mott said.

The Roth IRA does not have the same distribution requirements as the traditional IRA.

Mott said you can take distributions if you wish after age 59 1/2 and because the contributions are not deducted on your tax return when made, they will be tax-free as long as it has been five years since the account was opened.

Unlike traditional IRAs, there is no life expectancy table used to calculate the distribution, you can withdraw as much or as little as you need to meet your living expenses, Mott said.

Also unlike the traditional IRA, you will be able to continue making contributions to your Roth after age 70 1/2 as long as your modified adjusted gross income falls below certain limits based on your filing status and it exceeds the annual contribution amount, she said.

The maximum contribution allowed for 2018 is $5,500 with an additional $1,000 catch-up contribution for those over age 50. Ordinarily this contribution limit would apply to both IRA accounts.

Your 401(k) plan may allow you to defer taking RMDs while you continue to work, even on a part-time basis, as long as you don’t own 5 percent or more of the company, Mott said, so you should confirm this detail with your plan administrator.

“Upon your retirement, you will need to take your first RMD by April of the following year if they allow the deferral,” she said. “In the interim, you may continue to contribute to your 401(k) up to the maximum of $18,500 for 2018 and because you are over age 50, a catch up of $6,000 is also permitted.”

When the time comes that you are no longer working, you may wish to consider rolling over your 401(k) into your traditional IRA.

Each traditional IRA and 401(k) account you own will need its own RMD amount calculated, Mott said.

“The sum total of distributions for the IRAs can be taken from one or more of the accounts, but the 401(k) withdrawals cannot be pooled and must come from each account individually,” she said. “For ease of calculation and distribution, consolidating retirement accounts can make the process less complicated.”

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This post was first published in February 2018.