Dear Penny: Can I Keep Saving for Retirement if I’m Already Retired?

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Dear Penny,

I am retired and have a Roth IRA and a 401(k) from a previous employer. If I take the required minimum distribution out by age 72, can I invest that money in the IRA? Also, how do I determine what the amount of my RMD should be? 

-Retired

Dear Retired,

The IRS sure does get bossy about how we save and spend our retirement money, huh? Blame the labyrinth of rules on those sweet tax breaks we get with retirement accounts. Uncle Sam’s kindness has a limit.

Before I answer your questions, a quick primer on RMDs: These are the distributions the IRS tells you that you must take from a tax-deferred retirement account, like a 401(k) or traditional IRA. Until recently, you had to start taking distributions by age 70 ½. But last year, the SECURE Act bumped that to age 72.

Then coronavirus happened and the market crashed. So Congress told the IRS not to make anyone take RMDs in 2020 so that retirees would have time to let their investments recover.

Why does the IRS care when you withdraw your money? Well, when your money’s in a tax-deferred account, you haven’t paid income taxes on it. By the time you’re 72, the IRS is itching to get its cut. But in order for them to tax the money, you have to withdraw it first, which is where RMDs come in. Note that there are no RMDs for a Roth IRA, because you have already paid taxes on the money you contribute to one.

OK, now for your first question: You can’t use retirement distributions to fund your IRA, be it a Roth or traditional.

That’s because the IRS has some pretty strict rules there, as well: You can only fund an IRA with earned income, which is money you make from a job or self-employment. Your contributions can’t be greater than the amount you earn, and even then, you’re limited to $6,000 a year, plus an annual $1,000 catch-up contribution once you reach age 50.

As for your second question about figuring out your required distributions: This part gets really complicated. The best place to start is to contact your plan administrator, who should be able to give you the correct amount.

Ultimately, the IRS bases the required distribution on something it calls your life expectancy factor, which it calculates based on your age. For someone who turns 72 in 2020, the life expectancy factor would be 25.6 years. So if you had a $250,000 balance and you turned 72 in 2020, you’d divide $250,000 by 25.6 to calculate your required distribution, which works out to $9,765 for the year.

But it’s essential to consult with your plan administrator and a CPA about the rules for taking distributions, because the penalties for getting this wrong are harsh — up to 50% of the underpayment if your distribution isn’t enough.

OK, now that we’ve been through the weeds and back, here’s a glimmer of light: The fact that you’re looking to invest your retirement income suggests that you’re in a good place financially. So many retirees struggle with basic living expenses on little more than what they get from Social Security.

There are plenty of ways that you can invest your money once you have to start withdrawing it from your 401(k) — just not in your Roth IRA.

Municipal bonds are a popular option for many retirees, particularly those who are in a high tax bracket, because they provide a tax-free source of income. The interest you earn isn’t taxed at the federal level. And if you live somewhere with a state income tax, you could also avoid these taxes by investing in bonds issued by your state.

Another option, of course, is to open a taxable brokerage account and invest your money however you want.

But if you’re really aching to keep making those Roth IRA contributions, there’s an easy way to do that. You can start earning wages again by getting a part-time job. There are no age limits for contributing to a Roth IRA as long as you’re earning income.

It doesn’t sound like you’re in a situation where you need to work again — it’s just an option if you want to keep funding your Roth IRA.

Regardless of whether you want to work, you have plenty of options for putting your money to work, even if a retirement account isn’t one of them.

Robin Hartill is a senior editor at The Penny Hoarder and the voice behind Dear Penny. Send your tricky money questions to [email protected]