Earned income is not bank interest or dividends or a pension or life insurance proceeds or an insurance settlement or an inheritance or withdrawals of defined-contribution plan assets, including IRA withdrawals.

That said, the most-common form of earned income is a wage or salary. Annual contributions to an IRA must be completely offset by earned income.

Example: In 2019 Bob, a pensioner, earned $4,000. The most he is allowed to contribute to his IRA is $4,000 even though the law allows up to $6,000, or $7,000 if older than 50.

Having earned income is now the sole requirement for making contributions to your IRA. Prior to January 1, 2020 there was a maximum age requirement which was repealed on that date. Now, regardless of age, if you have earned income you can contribute to your IRA. My advice is to make that a Roth IRA.

Example: Bob is 80 and working part time for his son-in-law. He expects to earn about $28,000 in 2020. Bob is eligible to contribute $7,000 to his Roth IRA, the maximum allowed for 2020.

Prior to Jan. 1, IRA owners began their Required Minimum Distributions (RMD) at age 70.5. Effective on that date, the age increased to 72.

Remember: even if you’re working past 72 and making annual contributions to your IRA, you must also take your annual RMD. My colleague Barry Lisak will also be writing about the new SECURE act. Stay tuned.

Are you under the mistaken belief that the dollar amount of the income tax you do not pay today on your pre-tax Defined Contribution plan contribution will be paid later when you withdraw funds from your account? The amount of the tax will not be the same because it all depends on your taxable income in those later years.

Here is some food for thought: 1. Your future pension will be 100 percent taxable. 2. Your future Social Security will be 85 percent taxable. 3. Your future withdrawals from your defined-contribution plan will be 100 percent taxable. 4. Your future withdrawals from your IRA will be 100 percent taxable.

Total up all these taxable withdrawals and your taxable income will be more during retirement than while working.

Tip: Contribute all you can and only on the after-tax, Roth basis. Are you making in-plan conversions from your Deferred Compensation 457(b)/401(k) Plan account to the account’s after-tax Roth feature? Contact me for assistance.

Of Note: The highest tax bracket is owned by single filers. A married couple must plan for the future when the sole survivor will be burdened by those highest brackets.

Tip: Contribute all you can and only on the after-tax Roth basis.


Mr. Frank is a fee-only Retirement Financial Planner and a retired city high school Teacher of Accounting. He can be reached by phone at (732) 536-9472, or via email at rollover@optonline.net.


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