Funding a Roth IRA During the Year You Retire

[G-Man]

There are a number of scenarios that could play out during the year I retire that may have an impact on funding my wife and I Roth IRA. For 2023, I have already funded my wife and I Roth IRA using the backdoor Roth IRA conversion method. We don’t qualify for direct Roth IRA contributions filing as a married couple.

1. Based on the timing of retiring during the year (this year or next year), I may qualify for Roth IRA contribution and would not need to do the backdoor Roth IRA conversion method. However, I have already done the backdoor Roth IRA conversion method this year. What will happen?

2. There may be a scenario where I will retire, but my wife will continue to work. She loves her job. To contribute to her Roth IRA, would I use the backdoor Roth IRA conversion method or directly contribute to her Roth IRA?

There may be other scenarios that play out when one spouse is retired, and one continues to work.

 

[Exchme]

It is a combined contribution limit between Roth and traditional IRAs ($6500 each this year for folks under 50, $7500 each if 50 or older). So if you have done backdoor contributions for both of you, you are done for this year.

Next year, if your combined MAGI is less than the limit, you can each do a Roth contribution up to next year's contribution limit directly as long as your wife's earned income is greater than the total of the two contributions.

 

[MarieIG]

I don't believe that you need to do anything, if you've already done the backdoor - as anyone with earned income can contribute to a regular (non-deductible) IRA. The problem comes in when you earn over the income limits for the direct Roth contributions; and you have to "fix it."

If you retire, and your spouse continues to work, as noted by Exchme, you would still be eligible to contribute (of course monitoring your income limits) to determine whether the contributions would be via a direct Roth or a backdoor/ or conversion (filing the 8606 to establish the cost basis).

In preparation for my own retirement, I did a backdoor conversion (as explained by Pb4uski), putting my pre-tax IRA growth into my 401k and segregating my post-tax contributions, which enabled me to convert the post-tax to a Roth without the pro-rata requirement being a factor. The year of my retirement, I had only a Roth IRA, so was able to make a contribution into a non-deductible IRA, (I put it in a settlement fund) and converted it a few days later so it had only earned about six cents, and was not really a taxable event.

 

[cathy63]

Even if you qualify for a direct Roth contribution, you can still do the backdoor method. It's just extra unnecessary steps in that case. So if you've already done it this year, you don't have to undo it.

If your wife continues to work after you retire, then in addition to contributing to her IRA (or Roth IRA) she can also make a spousal contributition to your account. She's allowed to contribute up to the limit for each of you as long as she has enough earned income to cover it.

 

[G-Man]

It is a combined contribution limit between Roth and traditional IRAs ($6500 each this year for folks under 50, $7500 each if 50 or older). So if you have done backdoor contributions for both of you, you are done for this year.

Next year, if your combined MAGI is less than the limit, you can each do a Roth contribution up to next year's contribution limit directly as long as your wife's earned income is greater than the total of the two contributions.

We are over 50, so the $15K for backdoor contributions for 2023 is done.

For next year, if my wife continues to work and I retired in 2023, she can contribute to her and my Roth IRA as long as she earns $15K (gross income) or more for that year. In addition, we can continue to use the backdoor contribution method as well.

 

[pb4uski]

We are over 50, so the $15K for backdoor contributions for 2023 is done.

For next year, if my wife continues to work and I retired in 2023, she can contribute to her and my Roth IRA as long as she earns $15K (gross income) or more for that year. In addition, we can continue to use the backdoor contribution method as well.

If you retire in 2023 and she continues to work then from what you wrote it sounds like you could both do conventional Roth contributions in 2024, no need for backdoor contributions.

 

[G-Man]

If you retire in 2023 and she continues to work then from what you wrote it sounds like you could both do conventional Roth contributions in 2024, no need for backdoor contributions.

You are correct. We could do direct Roth IRA contributions in 2024.

 

[G-Man]

One more follow-up question.

I typically will fund my wife and I Roth IRA at the beginning of the year. Funds are deposited in my brokerage account and with the help of Fidelity it is transferred to my wife and I T-IRA and then immediately transferred to our Roth IRAs thus creating a Roth backdoor conversion.

If I retire and my wife continues to work, can the source of the Roth funding for my wife and I Roth IRA still come from my brokerage account. Or do I need to create a brokerage account for my wife and link her checking account to fund her and my ROTH IRA. In the background I would just deposit the money into her checking account.

Just trying to be in compliance if there is an IRS requirement.

 

[cathy63]

You can source the contribution from whatever account you want. There is no tracking of whether the specific dollar originally came from a paycheck or not.

It might be a good idea to wait until you/she have earned the money you're going to deposit though. If something happens and she ends up unemployed, you can always withdraw part of the contributions, but you'd have to remember to do that. If you wait until she's earned enough to cover them, you don't need to think about them again.