Roth IRAs for the Older Investor

June 16, 2023

Q: I retired last year. I receive a pretty good pension and I would like to contribute some of that money into a Roth IRA. Is that possible?

A: You can only contribute what the IRS deems to be “earned income” to a Roth IRA. Unfortunately a lot of the income many retirees receive does not fall into that category. For example, the IRS specifically excludes Social Security benefit payments, retirement pensions, interest, dividends, and passive income from rental real estate from earned income. Alimony, child support and unemployment benefits are also excluded.

On the other hand, wages, salaries, tips or other taxable income earned while working for someone else or as a self-employed individual are considered “earned income” for Roth IRA purposes. Union strike benefits and long-term disability payments received before retirement also qualify as earned income by the IRS.

Even if you do not personally have earned income, you may be able to contribute to a Roth if your spouse is still working. As long as your combined adjusted gross income is less than $228,000 in 2023, she can contribute some of her earned income to your Roth up to the maximum allowed. However, her total contributions to both her IRA and your Roth must be less than her total earned income.

One last point: instead of doing a Roth contribution, you might think about converting a portion of a traditional IRA or 401(k) account to a Roth account. You can do Roth conversions regardless of income level or whether or not you have earned income. However, be careful. There are nuances to Roth conversions, and if you are not careful you can easily offset any potential advantage with higher taxes.

Q: I am 75 years old. Can I still contribute to a Roth IRA?

A: There is no age limit for contributing to a Roth IRA, however, you must have earned income. You can do a Roth conversion at any age.

Q: I turned 72 this year so I will need to start taking required minimum distributions from my IRA. Can I invest my RMD into a Roth?

A: Unfortunately, IRS rules prohibit investing your required minimum distribution (RMD) into a tax-advantaged retirement account. However, after you take the RMD, you can convert any portion of the remaining IRA into a Roth. You can use the RMD to help pay the tax bill that results from the conversion.

Although converting to a Roth will likely cost you additional taxes this year, it will also reduce the amount of taxable RMDs you will have to take in the future. I suggest you work with your tax professional or financial advisor to see if a Roth conversion makes sense for you.

An important side note on RMDs: If you try to rollover your RMD into an IRA or convert it to a Roth, the IRS will deem you to have made an excess contribution. They will charge you a 6% per year penalty for every year you leave it in the IRA or Roth.

Q: I am an older investor and I would like to open a Roth IRA to benefit my heirs. I understand the Roth needs to be open at least 5 years in order to receive the tax benefits. What happens if I die before the 5 years is up? Do my heirs still inherit a Roth IRA or does it convert to a traditional IRA?

A: This is a tricky area. Those who inherit Roth IRAs are required to take RMDs and RMDs are tax-free. However, if the heirs take distributions in excess of the RMD before the 5-year period is up, the earnings portion of the excess distributions will be taxed as ordinary income. Your heirs need to understand that distributions of contributions to Roth IRAs are always tax-free. It is only the earnings portion that is subject to taxation if the 5-year rule is not met. Fortunately, IRS rules say that IRA contributions are distributed first, which should give heirs a little breathing room if they need to make withdrawals.

Please see important disclosure information here.

Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey.   He welcomes questions you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to