Question: Can we still put money into my IRA even though my wife and I are no longer working? We are retired and living off of our retirement and investment income. I am looking for ways to lower our taxes.
Answer: Wouldn’t it be nice if you could put some of that retirement and investment income into an IRA and deduct it as an adjustment to your income to lower your tax bill? But IRAs are designed to help taxpayers save for retirement while they are working, not after they retire.
Congress authorizes certain tax benefits to encourage workers to save, such as tax-deferred growth in an IRA. The tax laws allow you to contribute to an IRA or other retirement account while you are receiving compensation during your working years. The law is very specific in regards to the definition of compensation for the purpose of contributing to an IRA. Income the IRS considers as compensation for the purpose of contributing to an IRA includes wages and salaries, commissions, self-employment income, alimony and separate maintenance payments, and nontaxable combat pay. It does not include earnings and profits from property, interest and dividend income, pension or annuity income, deferred compensation, income from certain partnerships, tax-free income except combat pay, and social security benefits.
Question: I am 71, still working, and beginning to take required minimum distributions from my IRA. Since I am still working and receiving compensation, can I continue to contribute to my IRA?
Answer: Your compensation would qualify you to contribute to your IRA, but only until you reach the age of 70 ½ (seventy and one-half). Once you reach that age and begin your required minimum distributions, you are no longer eligible to contribute to an IRA.
Question: Can I contribute to my 401(k) account at work after I reach 70 years of age?
Answer: Yes you can. And you won’t have to take required distributions until you retire (unless you own 5% or more of the company that employs you).
Question: I rolled my 401(k) plan into an IRA and thought it would be tax free. However, I just received my copy of the 1099-R form from the 401(k) custodian, meaning they reported my distribution to the IRS. How do I report this on my tax return as not taxable?
Answer: It’s easy, but you need to get it right to avoid any hassles down the road. For nontaxable withdrawals from retirement accounts, you enter the total distribution from Box 1 of the 1099-R on Form 1040 line 15a (for IRA withdrawals) or line 16a (for 401(k) withdrawals). You then enter the taxable amount from Box 2a on your 1099-R (if that is the correct amount, which isn’t always the case) on line 15b or 16b. If the custodian entered the incorrect amount or no amount in Box 2a, enter the correct taxable amount on line 15b or 16b and attach an explanation to the return and keep good records because the IRS may ask you about it later. For rollovers, enter “Rollover” next to line15b or 16b. For more details, go to the IRS website and see pages 24-26 in the instructions to Form 1040.
Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment manager and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning. Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to firstname.lastname@example.org.