I turn 70 this year and am working part-time. I don't necessarily need the income but I like my work and it gives me money to spend on a few "extras." I also want to keep saving what I can. I know a lot of the rules around retirement saving have changed recently and I'm uncertain what my options are. Can you help clarify?
With the recently passed SECURE 2.0 Act, this is a great time to be asking this question. The over-70 labor force is growing fast according to a recent report from the U.S. Bureau of Labor Statistics, so it's particularly timely that the rules and regulations around earning and saving in our later years are catching up to our reality. And if you decide to keep working, I say great. As you point out, it not only provides some extra income, it's also a way to stay active and engaged. To my mind, that's an ideal scenario.
And yes, there have been a lot of changes to how older adults can treat earning and saving for retirement. The SECURE Act of 2019 started the ball rolling and the recently passed SECURE 2.0 has built on that momentum. Let's first review some of the changes specifically to required minimum distributions (RMDs), and then also look at changes and opportunities related to IRAs, employer plans and taxable accounts.
RMD rules—the biggest change
While the first SECURE Act pushed the RMD age out to 72, SECURE 2.0 gives you an even greater reprieve from taking your RMD. Beginning January 1, 2023, the new RMD age is 73. So anyone like you who didn't turn 72 by 2022 has an extra year before having to take their RMD. (And in 2033, the RMD age will increase to 75.)
This age 73 requirement applies to most retirement accounts, including traditional, SEP and SIMPLE IRAs, and qualified plans such as a 401k, 403b, and 457. Roth IRAs—and starting in 2024 Roth 401(k)s—are exempt. More on this below.
Another important change is the penalty for not taking an RMD on time. The previous penalty for not complying with RMDs was 50% of the amount that should have been withdrawn. That penalty is now reduced to 25%, and 10% for IRAs if corrected in a timely manner. Although not as onerous, that's still potentially a lot of money, so when approaching your RMD age, make sure you understand the withdrawal rules.
The first SECURE Act removed the age cap for contributing to a traditional IRA if you have earned income. This change puts traditional IRAs on par with Roth IRAs, which never had an age cut-off. So if you want to keep contributing to an IRA while you're working, go for it. Also, thanks to SECURE 2.0, starting in 2024 the $1,000 catch-up contribution for those 50 and older will be indexed for inflation, so it could increase annually.
Just be aware that contributions to a traditional IRA may or may not be deductible. The amount you can deduct may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels. If neither you nor a spouse is covered by an employer's retirement plan, you can deduct the full amount. If you aren't able to deduct contributions to a traditional IRA, contributing to a Roth may make more sense, assuming you fall under the income limits.
Also keep in mind that even if you're working and making contributions to a traditional, SIMPLE or SEP IRA, you'll still have to take an RMD when you reach the appropriate age.
Does it make sense to contribute to an IRA while being subject to RMDs? In short, yes. This is because RMDs require you to withdraw only a portion of these accounts. By contributing to your IRA, you're effectively replenishing your retirement savings. If you can deduct the IRA contribution, you also offset some of the tax hit from taking RMDs.
Employer retirement plans
If you're working for an employer after you reach RMD age and have a traditional 401(k), 403(b) or 457(b), you don't have to take an RMD from that account until you leave your job. This can be a convenient way to save and defer taking RMDs. Plus, expanded eligibility rules under SECURE 2.0 make it easier for employers to enroll long-term, part-time employees in their retirement plan.
Many employers also offer Roth 401(k)/403(b)/457(b) plans, which can be a great option. And a significant change of SECURE 2.0 is that these plans won't be subject to RMDs starting in 2024.
If you're working only part-time and you meet certain eligibility requirements, a Roth IRA can also be a good choice. You can continue to contribute indefinitely, and because Roth IRAs aren't subject to RMDs, your savings can accumulate tax-free for longer.
Remember you can always invest in a taxable brokerage account no matter your age—whether you have earned income or not. While taxable accounts don't offer the same tax benefits as retirement accounts, withdrawals of assets invested for more than a year are eligible for long-term capital gains rates—which can be lower than ordinary income tax rates. There's also no RMD with a taxable account.
I think working part-time and continuing to save is a winning strategy for both your financial and personal health in retirement. The extra income can help improve your lifestyle and the extra savings can help you better prepare for the unexpected. And now SECURE 2.0 gives older adults even more opportunities to keep going and growing their money.