Can a Retiree Set Up a Roth IRA?

One of the most convenient features of the Roth IRA is that, unlike the traditional IRA, you can establish and fund one at any age. In addition, you never have to take a distribution, which means the account can become a wealth-transfer vehicle. If the money you earn after you retire is within Internal Revenue Service limits, you can open a Roth IRA.

Roth Income Eligibility

The IRS lets anyone with earned income establish a traditional IRA. Whether you can open a Roth IRA depends on your tax-filing status and income. Married taxpayers filing jointly who have a modified adjusted gross income of $183,000 or more are barred from eligibility. Single taxpayers lose their eligibility at MAGI of $125,000.

Earned Income

The Internal Revenue Service defines earned income to include wages, commissions, salaries, tips, taxable military pay and alimony. Investment, rental and royalty income, on the other hand, are not included. Neither are pension, Social Security, disability and annuity income.

Yearly Contribution Limit

As of 2012, Roth owners 50 and older can contribute $6,000 per year to their account(s). Relative to contributions, the IRS considers all IRAs as one IRA. Even if you own two or more Roth accounts, you cannot contribute more than $6,000 total. For example, if you own three accounts, you can put $3,000 in one, $1,500 in the second and $1,500 in the third.

Wealth Transfer

Even if you wait until retirement age to set up a Roth, establishing an account can be a convenient way to pass money along to your heirs. For example, you set up a Roth at age 65 and put in the maximum each year. When you pass away 20 years later, your spouse assumes the account and continues to contribute the maximum. After her death eight years on, the $168,000 in principal plus any attendant earnings pass to your children who take yearly distributions over a lifetime. The money that remains in the Roth during the children's period of distribution continues to earn interest tax-free. Such an inheritance may be smaller than what the children would have received if you had opened the Roth at age 25, but it is still tax-free income.