Generation X Guide to Roth IRAs

If you’re part of Generation X (those born from 1965 through the early 1980s), your retirement goals are likely coming into sharp focus. With most Gen Xers in the midst of their highest earning years, now is the time to make the most of your retirement contributions.

While many contribute to employer-sponsored plans like a 401(k) or a 403(b), an individual retirement account (IRA) is another great way to boost your retirement funds.

Both traditional IRAs and Roth IRAs have their benefits, but which one will give you the most benefit depends on your financial situation and how close you are to retirement.

Key Takeaways

  • Roth IRAs offer tax-free withdrawals, great flexibility, and access to your contributions even before retirement if needed.
  • To withdraw earnings (not contributions), you must be at least 59 1/2 and have held the money for at least five years.
  • Roth IRAs don’t require minimum distributions at any age. Traditional IRAs do.

What Makes a Roth IRA Different?

Both traditional and Roth IRAs allow you to invest your money with tax advantages.

  • With a traditional IRA, your contributions lower your taxable income for the year in which you pay it into your account. You'll pay income tax on the money only when you withdraw it.
  • Roth IRAs are funded with after-tax money. The money and its earnings will be tax-free when you withdraw it.

One of the key differences of a Roth IRA is the flexibility to withdraw your contributions at any time for any reason. Anyone of any age can withdraw the money they have paid into the Roth IRA. Want to buy a boat? Your Roth IRAs can fund that purchase, tax-free and penalty-free. Though you might keep in mind that it's your retirement fund that's sailing away.

Withdrawing the money earned on those contributions will trigger taxes at your current income tax rate as well as a 10% penalty. This same penalty applies to unqualified withdrawals (of both your prior contributions and your earnings) from a traditional IRA.

While there is no age threshold to start a Roth IRA, there is an age limit to withdraw your earnings without being taxed or incurring a penalty. To avoid taxes and penalties, you must be 59½ years old and must have had the account for five years, unless your withdrawal is considered qualified. Qualified distributions include those taken by a person with a permanent disability, by a beneficiary after your death, or by a qualified first-time homebuyer.

If you want to withdraw your earnings after age 59½, you still must meet the five-year rule. If you don’t, you will pay a 10% penalty.

The 5-Year Rule

If you are a Gen Xer and thinking about opening a Roth IRA, one important thing to remember is the five-year rule. This rule states that to withdraw money tax- and penalty-free, you must be at least 59½ years old and it must have been at least five years since you first started contributing to your Roth IRAs.

This may not seem like a stumbling block for some Gen Xers, especially those at the younger end of the spectrum. However, for those who were born in the beginning of the generation, it may mean that you can’t access your investments without incurring taxes and penalties for quite a while.

For example, if you start a Roth IRA in 2022 at age 57, you cannot withdraw your funds until age 62, unless you’re willing to pay your current income tax rate on the earnings, as well as a 10% penalty. In an investment account that’s attractive because of its tax-free growth, this can be a big drawback.

Contribution Limits

The IRS stipulates a limit to how much you can contribute to a Roth IRA each year. In 2022, the aggregate amount of contributions allowed for traditional and Roth IRAs (combined) is $6,000. For 2023, this threshold has been increased to $6,500.

Another important aspect of contribution limits is their income restrictions. The IRS outlines a phase-out schedule in which you are only able to contribute a partial amount (or no amount) to your Roth IRA if you make too much money. The phase-out table for 2022 and 2023 is below, with the phase-out being based on the taxpayer's filing status and modified adjusted gross income (MAGI).

Roth IRA Contribution Phase-Out, 2022 and 2023
Filing Status  2022 MAGI 2023 MAGI Contribution Limit
Single or Head of Household Less than $129,000 Less than $138,000 Full contribution allowed
  Between $129,000 and $144,000 Between $138,000 and $153,000 Partial contribution allowed
  Greater than $144,000 Greater than $153,000 No contribution allowed
Married Filing Jointly Less than $204,000 Less than $218,000 Full contribution allowed
  Between $204,000 and $214,000 Between $218,000 and $228,000 Partial contribution allowed
  Greater than $214,000 Greater than $228,000 No contribution allowed
Married Filing Separately Between $0 and $10,000 Between $0 and $10,000 Partial contribution allowed
  Greater than $10,000 Greater than $10,000 No contribution allowed

Catch-Up Contributions

If you are a part of Gen X, you do have one thing on your side: the catch-up contribution. If you’re age 50 or older, you may contribute an extra $1,000 to your Roth IRA, bringing your total yearly contribution to $7,000 in 2022 and $7,500 in 2023. This can help make up for lost time if you’ve started a bit later in life.

Roth IRAs as an Inheritance

One of the most important differences between a traditional IRA and a Roth IRA is the ability to delay taking a minimum distribution. Since you’ve already paid taxes on your income before contributing to your Roth IRA, you don’t really ever have to withdraw the money. That money can continue to grow and compound interest until you die.

Traditional IRAs are just the opposite. Since they are funded using pretax money, required minimum distributions (RMDs) begin at age 73. (The age was raised to 73 from 72 as of Jan. 1, 2023.)

If wealth-building for your heirs is your goal, a Roth IRA offers a tax-advantaged way to do that.

Is It Worth Opening a Roth IRA If I Am Towards the End of My Career?

This is a personal decision. If you’re over age 50, you’re likely in a higher tax bracket than you will be when you retire. If this is the case, you may benefit more from the tax break offered by a traditional individual retirement account (IRA).

However, a Roth IRA offers flexibility that a traditional IRA doesn’t, especially when it comes to withdrawing your contributions. If you don’t think that you’ll need the money, a traditional IRA will offer greater tax savings if you are an older Gen Xer.

Can I Withdraw My Money As Soon As I Turn Age 59½?

Yes—with one condition. As long as you have satisfied the five-year rule, you have access to the entirety of your Roth IRA without taxes or penalties as soon as you reach age 59½. If you haven’t, you must wait until five years have passed since you established your Roth IRA.

If I Die, Will My Beneficiaries Have to Pay Taxes on My Roth IRA?

No. In the event of your death, all funds in your Roth IRA are available, tax- and penalty-free, to your beneficiaries.

The Bottom Line

Roth IRAs offer an opportunity for tax-free growth for your investment dollars.

If you’re nearing retirement and haven’t started a Roth IRA, look closely at whether the tax aspect actually works to your advantage. If you’re earning more at this stage of your career, you may be paying a higher tax rate than you would if you paid taxes on your distributions from a traditional IRA.

Either way, a Roth IRA offers great flexibility for withdrawing your contributions and the opportunity to pass on tax-free money to your heirs.

Article Sources
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  1. Internal Revenue Service. “Retirement Plans FAQs on Designated Roth Accounts: What Is a Qualified Distribution from a Designated Roth Account?

  2. Internal Revenue Service. “Retirement Topics — Required Minimum Distributions (RMDs).”

  3. Internal Revenue Service. “Traditional and Roth IRAs.”

  4. Internal Revenue Service. “Topic No. 557 Additional Tax on Early Distributions from Traditional and Roth IRAs.”

  5. Internal Revenue Service. “Retirement Topics — Exceptions to Tax on Early Distributions.”

  6. Internal Revenue Service. "401(k) Limit Increases to $22,500 for 2023, IRA Limit Rises to $6,500."

  7. Internal Revenue Service. “Retirement Topics — Catch-Up Contributions.”

  8. Internal Revenue Service. "Roth Comparison Chart."

  9. United States Senate Committee on Finance. "SECURE 2.0 Act of 2022."

  10. Internal Revenue Service. “IRA FAQs — Distributions (Withdrawals).”

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