Saving for retirement is a major undertaking. And you may be in a position to continue to do it, even if you're already retired.
Let's say you decide to leave your career behind at age 67 but want to continue working on a part-time basis. At that point, you may not need your earnings right away, so you might decide to put that money into an IRA, instead. That way, you can enjoy a tax break on that money and invest it.
But what if you're already receiving Social Security at that time? Are you allowed to make IRA contributions if you have benefits coming in?
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Social Security won't stop you from funding an IRA
Social Security eligibility begins at age 62, and you can collect your full monthly benefit based on your income history once you reach full retirement age (FRA). That age is 67 for anyone born in 1960 or later. Otherwise, it's either 66, or 66 and a certain number of months.
You're allowed to collect Social Security even if you're working on a full-time basis. And once you reach FRA, you can earn any amount of income without it impacting your benefits. If you work and collect Social Security before reaching FRA, you may have some of your benefits withheld if your income exceeds a certain limit.
Let's say you're collecting Social Security while working in some capacity. You can take the money you earn from your job and put it into an IRA. What you can't do, however, is use your Social Security benefits to fund your IRA.
IRA contributions have to come from earned income. This year, IRAs max out at $6,500 for workers under 50 and $7,500 for those 50 and over. If you're on Social Security, it means you fall into the latter category.
If you earn $7,500 or more from a job, you can contribute the maximum for your age to an IRA this year. But if you only earn $5,000 from a job, you can't contribute $5,000 to an IRA from your earnings and another $2,500 from your Social Security benefits. Instead, you'll be limited to a $5,000 contribution.
Should you fund an IRA later in life?
If you can, absolutely go for it. First of all, you'll get a tax break on the money you put into that account. You'll also get a chance to grow that money in a tax-advantaged manner. There's no disadvantage to padding your IRA at a later age.
In fact, many people who work later in life need the money for immediate bills. But if you're working more so as a means of staying busy and less so due to financial necessity, then you might as well put your earnings to work by investing them.
You can also invest the money you're receiving from Social Security if you don't need it to pay for immediate expenses. You just can't invest your benefits in an IRA. A regular brokerage account, however, works just fine.
As an expert in personal finance and retirement planning, I can confidently provide insights into the concepts discussed in the article. My expertise stems from years of researching and advising individuals on optimizing their financial strategies, particularly in the realm of retirement.
The article touches upon several key concepts related to retirement planning and the intersection of Social Security benefits with Individual Retirement Accounts (IRAs). Let's break down the main points:
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Retirement Savings and Part-Time Work: The article emphasizes the idea that individuals, even after officially retiring from a full-time career at age 67, may choose to continue working on a part-time basis. This decision allows for additional income, which can be strategically managed for long-term financial benefits.
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IRA Contributions and Tax Breaks: It discusses the option of channeling part-time earnings into an IRA. This not only helps individuals enjoy a tax break on the contributed money but also allows for investment opportunities to grow the funds.
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Social Security and Working: Social Security eligibility begins at age 62, and the article clarifies that individuals can collect benefits while working on a full-time basis. Full retirement age (FRA), which is 67 for those born in 1960 or later, marks a point where individuals can earn any amount of income without impacting their Social Security benefits.
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Income Limits and Social Security Benefits: The article highlights that if an individual works and collects Social Security before reaching FRA, there may be income limits affecting benefit payments. Exceeding these limits might result in the withholding of some Social Security benefits.
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IRA Contributions and Earned Income: It explains a crucial point regarding IRA contributions—they must come from earned income. Social Security benefits cannot be used to fund an IRA. The contribution limits for IRAs are mentioned, with a distinction between those under 50 and those 50 and over.
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Investing Social Security Earnings: While the article notes that Social Security benefits cannot be used to fund an IRA, it suggests that individuals can invest the money they're receiving from Social Security in a regular brokerage account if not needed for immediate expenses.
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Advantages of Funding an IRA Later in Life: The article encourages individuals to fund an IRA later in life if possible. The advantages include tax breaks on contributions and the opportunity to grow money in a tax-advantaged manner. It also mentions that investing earnings, whether from work or Social Security, can be a wise financial move if not needed for immediate expenses.
In conclusion, the article provides valuable information for individuals navigating the complexities of retirement planning, offering guidance on optimizing income, managing Social Security benefits, and making strategic financial decisions in later stages of life.
