As workers stay on the job later in life and live longer than ever before, they may start questioning some of the basic assumptions of retirement investing. For example, can you ever be too old to open a Roth IRA and reap the benefits it offers in comparison with those of the traditional IRA?

Yes, a longer timeline to retirement means a heftier tax-free account balance down the line, but that doesn't mean that a Roth IRA can't be the better choice for an older employee.

Tax-Free Income

The point of a Roth IRA is tax-free retirement income. You pay the income taxes on the money you contribute to the IRA in that tax year. When you retire and begin withdrawing money, it's tax-free. That is, you already paid the taxes on the money you invested and the investment returns your fund earns are tax-free.

The traditional IRA creates tax-deferred retirement income. No income taxes are paid on the money contributed to the account in that tax year. But when you retire and start withdrawing money, you pay taxes on both your contributions and the investment returns it earned.

Why Not a Roth?

The Roth IRA has been growing in popularity since it was introduced in 1997, but even today only about 19% of investors in IRAs have one.

Why isn't this option more popular? One obvious reason is that it is more difficult for many people to give up a bit more of their take-home pay, month after month and year after year until retirement.

The question is, does that still apply to you? If you're in your peak earning years, you may find it's not as big a sacrifice.

Key Takeaways

  • If you're in your peak earning years, the take-home pay hit of a Roth IRA may not be as difficult to manage.
  • Unlike a traditional IRA, a Roth IRA places no age limit on new contributions.
  • A Roth IRA has no required minimum distribution either.

Fine Print on the Roth IRA

Withdrawals from Roth IRAs are tax-free if they are qualified. You can take your own contributions at any time. You already paid the taxes on that money. However, there are time restrictions on your access to the investment income in the account.

Your first distribution cannot be taken until five years after the year during which a contribution was first made to the account. If, for example, you’re 66 years old and make a Roth IRA contribution on July 15, 2019, you can take a tax-free distribution on or after Jan. 1, 2024.

Withdrawals from Roth IRAs during retirement are tax-free.

It doesn't matter whether or not you're still contributing to the account. In fact, in this example, if you make another contribution in 2020, you can withdraw from that at the start of 2024 as well.

If you take out earnings from the account before the five-year waiting period, they will be taxable and subject to a 10% tax penalty.

No Age Limit

There is no age limit on making contributions to a Roth IRA. That differs from a traditional IRA, which has a cutoff age for contributions of age 70½, whether or not the individual is still working. (Other IRA-based retirement plans such as SEPs and SIMPLE IRAs are not subject to this age limit.)

In addition, there is no requirement for when you must begin withdrawing money from a Roth IRA. The investor in a traditional IRA must take a required minimum distribution (RMD) at age 70½. The minimum is based on a formula that includes the person's life expectancy and account balance.

So, if you're still working and you want to continue contributing to an IRA, the Roth IRA is your only choice at age 70½. And, if you don't want to be forced to withdraw money from your IRA at age 70½, the Roth IRA is your only choice.

31%

The percent of Roth IRA investors who are under age 40.

There are annual limits for contributions to any type of IRA. For 2019, the contribution limit is $6,000, but those who are at least 50 years old can contribute an additional $1,000.

There are upper income limits as well for the Roth IRA. In 2019, people with gross incomes over $122,000 can contribute limited amounts, and eligibility phases out altogether at $137,000.

Create a Tax-Free Estate

If part or all of your Roth IRA outlives you, the person you designate as your heir will receive the funds tax-free.

If the beneficiary is your spouse, the money is not subject to minimum required distributions. If the beneficiary is someone other than your spouse, the minimums will apply.

The Designated Roth

The designated Roth account is a useful variation for some people, especially those with very high earned incomes.

Employees with 401(k) plans may have the option to make after-tax contributions to this type of account, which is similar to a Roth IRA. Any employer matching contribution cannot be added to a designated Roth.

The designated Roth has higher annual contribution limits than the standard Roth IRA and there are no income limits. However, there are required minimum distributions from age 70½ unless you are still working.