Pros and Cons of Investing in an IRA during Retirement

It's never too late to start investing in an IRA, but there's a few drawbacks.

Retired couple
••• baona/Getty Images

As more and more people are working in retirement, retirees often need to determine the best strategy for saving or investing their incomes. One option is to save and invest in an IRA during retirement. For one thing, many retirees already have an IRA set up by the time they get to retirement. However, there are pros and cons to investing in an IRA in retirement, and in some cases, you might be prohibited from doing so. What follows are some of the benefits and drawbacks to investing in an IRA during retirement.

Benefits of Investing in an IRA during Retirement

If you are working in retirement, the tax benefits of investing in an IRA can still be beneficial. Traditional IRAs offer tax-deductible contributions and Roth IRAs offer after-tax contributions with tax-free investment growth. However, after age 70.5, a Roth IRA could become a better solution for a retiree wanting to save because the Roth IRA is not subject to required minimum distributions while the owner is still alive. This allows you to continue to save, invest, and grow your money late into life without having the account reduced by RMDs.

Furthermore, a Roth IRA gives the owner the ability to spend the money when they want to spend the money, not when the government mandates distributions. Additionally, both Roth and Traditional IRAs can be a good place to store wealth and protect it from creditors while you are working. For a professional who may have some personal liability concerns, IRAs are the perfect place to shelter money.

IRAs offer a great deal of withdrawal flexibility, especially for those over age 59.5. You can pretty much take a withdrawal at any time, meaning you can spend money when you need to spend it and typically avoid any penalty taxes.

IRAs also offer many low-cost investment options today, and annuities can be purchased inside of an IRA to help provide lifetime income.

By continuing to fund your Traditional IRA or Roth IRA, you increase your total investments and most likely the longevity of your retirement portfolio. This can help you live a more financially secure retirement. A larger IRA account balance also increases the chances of leaving a larger legacy amount to your heirs. Both Traditional IRAs and Roth IRAs are great investment vehicles to inherit because the beneficiary can stretch out the tax benefits over a number of years once they inherit the account.

Drawbacks to Investing in an IRA

The greatest downside of trying to invest in an IRA when working in retirement is the restriction on investing in a Traditional IRA after age 70.5. Once you surpass age 70.5, you cannot contribute money to a Traditional IRA regardless of your income, filing status, or any other factor. The alternative is to consider contributing to a Roth IRA.

Another downside of investing in an IRA is the relatively low annual contribution limits. In 2019, for example, you can only contribute up to $6,000 a year in a Roth or Traditional IRA, plus a $1,000 catch-up provision if you are over age 50. The most you could contribute would be $7,000 a year, or $14,000 a year if you are contributing to a spousal IRA.

Additionally, funding an IRA during the early retirement years also increases the RMDs you must take once you reach age 70.5, which could actually subject you to higher taxes. While you get a tax benefit for saving in an IRA or Roth IRA, the tax benefits are more pronounced if you have a long investment time horizon. If you are only using an IRA or Roth IRA for a few years, the benefits are not as pronounced.

You actually might be better off investing after-tax money in a brokerage account in stocks that receive lower tax rates with long-term capital gains, as opposed to an IRA which is subject to ordinary income tax rates at the time of distribution.

While there are downsides to investing in an IRA in retirement, the benefits often outweigh the disadvantages if you have any personal liability, are trying to increase your legacy to heirs, or trying to maximize your Roth IRA savings. But pay attention to the rules that regulate when you can contribute and deduct an IRA contribution. Finally, always look at other savings options like investing directly in stocks that already receive preferential long-term capital-gains tax treatment.