Chris Stein, CFP®
Can I Make Roth Contributions After Retirement?
A podcast listener asks some questions slightly off-topic from Social Security today: what qualifies as ‘earned’ income, and can he make Roth contributions after retirement.
I have a Roth IRA question. I’ve been doing a Roth IRA via the back door each year since 2011, as well as a spousal back-door Roth for my wife. (I am over the income limits to put money in as a direct – or front-door – contribution.) I am 7 years older than my wife, who works part-time. I plan to retire at 65 and start withdrawing from my 401(k). Can you please review what is considered ‘earned’ income? And can I continue Roth contributions after I retire based on dividends, 401(k) withdrawals, or real estate income? My wife will likely continue working part-time. So long as she makes more than $14,000 a year, she should be able to contribute the maximum either via the front or back door, right? Could I become a nonworking spouse even if I am older? I do not plan to do Roth conversions because I already have a large Roth bucket as my new 401(k) contributions go 100% into the Roth. I would like to continue doing this as it makes more sense to me to take dividends from my taxable account and put them into a Roth, and also get $14,000 into a Roth from my wife’s earnings. Thanks in advance.
Definition of ‘Earned’ Income
Your first request is for a definition of ‘earned’ income. For purposes of contributing to retirement accounts, earned income comes from work. It can be from self-employment as long as you own a business that is paying you.
Dividends, capital gains, 401(k) distributions, and rental income are not going to qualify. They are passive income. An exception could be rental income if you are running a rental firm, and you are an employee. It can be a small firm, but one that manages all your real estate properties.
If you have just one rental, where you are receiving rental income, that doesn’t count as earned income. Merely owning a rental and collecting rent, even if you are the one going out at 5 p.m. on a Friday to unclog drains or change light bulbs, it is not considered income for purposes of contributing to a Roth or non-Roth as ‘earned’ income.
The best way to see the difference is to look at active and passive income. Earned income is essentially active income. You are being paid to actively go out and trade your time, effort, and abilities. Passive income is the opposite, even though it will be taxed the same way as active income.
If you start a legitimate company, say as a property management business, it could generate earned income for you if the company is buying the rental properties and paying Social Security, Medicare, and unemployment taxes in your name as a salaried employee. Even if it’s a one-person business, you are earning the income by managing the properties. In that case, yes, you can use that income to contribute to a Roth.
But for 99.9% of the people who own rental properties and either manage them or outsource to a rental management business, it’s considered passive income, not active. Even though passive income is taxed, it does not count for contributions to retirement accounts.
Contribute After Retirement?
You also asked about being able to contribute to a Roth after retirement. If your wife is going to be making $14,000 a year as active (and not passive) income, your other forms of income – which do not qualify in any case – become a moot point. You will then be the nonworking spouse.
Does it matter that you are older than your wife? No, it does not. The age of the nonworking spouse is irrelevant. It also does not matter if the funds come from part-time or full-time work, as long as the income is earned and is not passive.
But you can’t be contributing your own income and also put in $14,000 between the two of you because your wife is earning $14,000. That would be double-dipping. Who in the couple is recognizing the income is not the critical part. You are still constrained by the Roth contribution limits of $6,000 each if you are under 50, and $7,000 each if you’re over 50.
If you prefer, you can use your interest earnings to fund your own Roth, as long as your wife unlocks the Roth contribution door by having enough income for the married couple. The dollars she earns are ‘fungible.’ You don’t have to take the dollars that came home with her and put those exact dollars with those exact serial numbers into the Roth accounts. Your wife could use her earnings as spending money, and if you choose, you could even fund both accounts. What counts is that the $14,000 she earned gives the two of you the ability to fund a Roth for each of you each year, at $7,000 each.
You also mentioned that as long as your wife earns $14,000, she should be able to “contribute the maximum.” That’s true. But she only needs to earn $7,000 to contribute the max to her account. And she needs to earn another $7,000 for you to put the $7,000 max in yours. Her $14,000 earnings can be used to qualify the two of you, as a married couple. And, those funds have to go into two separate Roth accounts: one account for each at $7,000.