Q: I am retired from being self-employed, but the business is still operating. Can I go back to an hourly wage of at least $13,000 a year so my wife and I can contribute to our Roth IRAs? – Paul in Oceanside, Calif.
A: That depends on how your company is structured. “If you are self-employed, you can’t be on payroll,” says Grafton “Cap” Willey, a managing director at Providence R.I. tax consultancy CBIZ Tofias.
Fortunately, though, you and your wife may still be able to make contributions to a Roth.
Since the business is still operating, we’ll assume that it is a limited liability corporation and you are a partner. In that case you can take a draw, as opposed to a salary. If you continue to receive payouts, you can make Roth contributions of up to $6,500 each (assuming you are both at least 50) based on your share of net earnings from the business.
Another option is to put your wife on payroll and have her make contributions for both of you based on her earned income. As long as she isn’t named as a partner in your business, you can make her an employee. While there are no hard-and-fast rules, the IRS will require that she do some work related to the business in order to justify her salary. “There is a concept of reasonable compensation,” says Willey.
Either way, you’ll still need to fall within the income limits for a Roth. For married couples, contributions start phasing out at $183,000 adjusted gross income and go to nil at $193,000.
There are a lot of advantages to contributing to a Roth at any stage. You make after-tax contributions, and the money grows tax free from there on out. There are no required minimum distributions, and this money is excluded from estate taxes, Willey adds.
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That said, this strategy should make sense in the bigger picture. If you and your wife are happily retired – and don’t need the extra income – think twice about making drastic changes to your lifestyles simply to save a few extra bucks on taxes.
And remember, you always have the option of rolling savings in a traditional IRA or employer-sponsored retirement plan into a Roth.