Last Minute Ira Funding Tips for Those Near Retirement

Think You Don't Have Enough Cash to Fund Your IRA? Maybe You Do.

Financial advisor talking to couple on sofa
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Many people have savings but don’t always fully fund their retirement accounts because they don’t want to use their savings to do so. They are worried about reducing the amount of their emergency fund or cash reserves.

If you don’t have the extra income to fund retirement accounts out of cash flow that shouldn’t always stop you.

As you near retirement, you also get close to (or are already over) the age of 59 ½. At age 59 ½ you can take withdrawals from your retirement accounts without being subject to penalty taxes. That means your retirement accounts have now become far more accessible to you.

If you can take the money right back out without penalty, and if there is a tax advantage to putting money into your retirement accounts, then there is no reason not to do it.

As long as you have earned income, you can fund retirement accounts. You have until April 15th to fund accounts for the previous tax year. If you don’t have the available extra cash flow, you may be able to shift money from a non-retirement account into your tax sheltered retirement accounts. Here are three ways to do that.

Move Money From a Savings Account Into Your Roth IRA, HSA, or Other IRA

I love Roth IRAs. If you are eligible to fund a Roth, then, by all means, consider shifting some of your savings into a Roth for you and your spouse. You can always withdraw the contributions back out with no taxes or penalties. The advantage to the Roth is interest income is accruing tax-free.

Even better than a Roth, take a look at a Health Savings Account (HSA); you can fund those until you reach the age of 65, even if you don’t have earned income. (You have to have the appropriate type of health care plan to fund an HSA.)

If you make too much to fund a Roth and aren’t eligible for an HSA then see what other types of IRAs you may be able to fund, such as a Traditional IRA, Spousal IRA, or non-deductible IRA.

Use Interest From a CD That Hasn’t Matured Yet

Many CDs have penalties for early withdrawal, but you can often take the accumulated interest from the CD without incurring a penalty. If you own CDs that are not already inside retirement accounts, consider using the interest to fund retirement accounts.

Use a Penalty-Free Withdrawal From a Non-Qualified Annuity

Do you own an annuity that is not inside a retirement account? If you are over 59 ½, the gain can be withdrawn and it is not subject to penalty taxes, but it will be subject to ordinary income taxes. So if you are over 59 ½ and withdraw gain, and then contribute it to a deductible IRA, the transaction would be tax neutral. So why do it? If your annuity product has high expenses, you can shift money into the IRA and buy no-load index funds with much lower expenses. Before doing this make sure you aren’t ​voiding any irreplaceable insurance benefits that the annuity may offer.

Some older annuity contracts are worth keeping even if they have higher fees.

Retirement accounts offer creditor protection, tax-deferral, and in the case of Roths and HSAs, potentially tax-free withdrawals in retirement. It makes sense to get as much as you can into these types of accounts.