Whether or not you can open an individual retirement account (IRA) depends on several factors, and age is just one of them. Here’s a quick look at the main rules governing the two types of IRAs: traditional and Roth.
- There is no age restriction for contributions to Roth IRAs.
- You can now make contributions to traditional IRAs beyond the previous age limit of 70½ years, thanks to the SECURE Act.
- There is no age restriction for opening a new, traditional IRA as long as you fund it via a rollover or transfer from an eligible retirement account.
Types of IRAs
A traditional IRA allows investors to make contributions or deposits, and you receive a tax deduction equal to the contribution amount in the tax year that you made it. In return, you pay income taxes on your withdrawals or distributions in retirement.
A Roth IRA does not provide a tax deduction for contributions. However, any money withdrawn after the age of 59½ is tax-free, meaning there are no income taxes applied to those amounts withdrawn.
You have 15 months in which to make your participant contributions for any particular year—typically from January 1 to April 15 of the following year—and the IRS allows you to put your money in a wide range of investments, including stocks, bonds, and funds that contain a basket of securities, such as mutual funds, and exchange-traded funds (ETFs).
However, there are certain rules and restrictions, including contribution limits, age, and income requirements.
Let’s start with age. For Roth IRAs, it’s simple: There is no age restriction. For traditional IRAs, there is no age restriction if you are establishing a new IRA to which you will transfer or roll over assets from another IRA or eligible retirement plan, such as a qualified plan or a 403(b) or 457(b) account.
Also, there are no age restrictions for contributions to traditional IRAs as a result of the U.S. Congress passing the SECURE Act in 2019. Previously, individuals were only allowed to make contributions if they had not reached age 70½ in the year they make that first contribution.
In short, if you are over 70½, you can now contribute to a traditional IRA beyond that age as long as you're working.
The maximum amount you are allowed to contribute—or contribution limit—to either a traditional or Roth IRA for the tax year 2020 and tax year 2021 is $7,000 each if you're over 50 years old—$6,000 plus a $1,000 catch-up contribution each year.
For both types of IRAs, you must have earned income, or what the Internal Revenue Service (IRS) calls “taxable compensation,” to contribute. That includes wages and salaries, commissions, self-employment income, alimony, and separate maintenance and nontaxable combat pay.
What doesn’t count are earnings and profits from property, interest and dividend income, pension or annuity income, deferred compensation, income from certain partnerships, and “any amounts you exclude from income.
If you earn less than $7,000, you can only contribute as much as you make. In the case of a Roth IRA, your tax filing status and a high income may also curtail your contribution.
The tax deduction for contributions to traditional IRAs can vary, depending on certain conditions. If a retirement plan at work covers you or your spouse, you may not be allowed to deduct any or all of your contribution from your taxes. However, your income is a key determinant as well as your tax filing status, such as married filing jointly, single, widow, or married filing separately.
However, if you and your spouse are not covered by a plan at work, and your tax filing status is single, married filing jointly, or separately, you can take the full tax deduction regardless of your income.
The Bottom Line
If you are not eligible to make a participant contribution to a traditional IRA, talk to your tax professional about making a contribution to a Roth IRA instead. They can help you determine if this alternative suits your financial profile.