The earlier you start a Roth IRA the better, but opening a Roth IRA when you're closer to retirement can still make sense under several circumstances.

Sometimes your monthly cash flow gets a boost in your middle years. You might have extra funds available to invest after paying off the mortgage/home equity loan; or a major expense, like a child’s college tuition, goes away with his graduation. If that happens, you’ll want to make the most of that money.

Or you might realize your retirement savings calculations are coming up short. Don't feel bad: Whether it's the cost of living, investments performing poorly, or just stuff happening, many people have saved far less than they need for those golden years. You may want to do whatever you can to make up for it while you’re still earning income.

Another scenario: You've changed jobs and the new employer doesn’t offer a retirement plan like a 401(k). So it's much more up to you to make money-management arrangements.

Of course, if you have high-interest debt or don’t have an emergency fund, you should contribute any extra income to those priorities first. But if you’re squared away on both accounts, contributing to a Roth IRA in your late 50s, 60s, and beyond—assuming you qualify—can make a lot of sense.

Key Takeaways

  • You're never too old to fund a Roth IRA (assuming you're under the income limits).
  • Opening a later-in-life Roth IRA means you don't have to worry about the early withdrawal penalty on earnings (if you're over 59½).
  • No matter when you open a Roth IRA, you have to wait five years to withdraw the earnings tax-free.
  • Roth IRAs are ideal if you want to avoid required minimum distributions and/or leave tax-free funds to your heirs.

Lack of Limits on Roth IRAs

And, no, you aren’t too old to contribute. No age limit exists on making contributions to a Roth IRA—one way this account differs from its traditional IRA sibling, which cuts off contributions at age 70½, whether or not the individual is still working.

31%

The percentage of Roth IRA investors who are under age 40

The opposite holds true too: There is no requirement for when you must begin withdrawing money from a Roth IRA—again, in contrast to a traditional IRA, which mandates required minimum distributions (RMD) beginning at age 70½, in amounts based on your life expectancy and your account balance. With

So, once you're into your seventies, if you want to continue contributing to an IRA, the Roth IRA is your only choice if you're still working. And, if you're not working full-time, the Roth IRA is your only choice for contributing to a retirement account, period. On the back end, if you don't want to be forced to withdraw money from a retirement account at age 70½, the Roth IRA is your only choice. (You must also take RMDs from a 401(k) at that age unless you're still working for the company and you don't own over 5% of it.)

Income Limits for Roth IRAs

Although less restrictive than other accounts, Roth IRAs aren't totally without limits. Regardless of your age, your income must be under a certain level for you to be eligible to contribute to a Roth. That level depends on your tax-filing status.

For example, if you’re married filing jointly and your modified adjusted gross income (MAGI) is higher than $203,000, you can’t contribute anything to a Roth IRA in 2019. If it's between $193,000 and $203,000, you can contribute a reduced amount. Single people with gross incomes over $122,000 can contribute limited amounts and eligibility phases out altogether at $137,000.

This rule can be a bummer for people with high earnings. But there’s a strategy for getting around it, known as a backdoor Roth IRA. See Converting to a Roth IRA, below.

There are annual caps on the amount you can contribute 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—the so-called "catch-up" contribution.

The key requirement for contributing to a Roth IRA at any age is having "earned income." As long as you’re working—whether part-time or full-time, for yourself or someone else—you can contribute to a Roth. However, you can't contribute more than the amount you've earned that year. Income from Social Security benefits, pensions, and investments does count towards your MAGI and your qualifying for a Roth, but it doesn't count as earned income and so can't be contributed to the Roth.

If you and your spouse are married filing jointly, and you both establish Roth IRAs, one spouse can contribute up to the maximum for both spouses ($14,000 if both spouses are 50 or older, for 2019). That's true even if only one spouse worked, or if both spouses worked but one spouse earned less than the contribution limit.

The Roth 5-Year Rule and Older Investors

When you turn 59½, you can withdraw earnings from your Roth IRA without getting slapped for being too young-the 10% early withdrawal penalty But you can’t open your first IRA at age 58 and start withdrawing earnings penalty-free a year and a half later. That's because Roth IRAs have what’s called a 5-year rule. Any money you put into a Roth has to stay there for five tax years if you want the earnings generated by that contribution to be tax-free when you withdraw them (and you do).

This rule doesn’t apply to each contribution or to each account. Once you make your first Roth IRA contribution and five tax years go by, any earnings you withdraw will pass the five-year test.

Younger folks obviously don’t have to worry about the 5-year rule. But if you open your first Roth IRA at age 63, try to wait until you're 68 or older to withdraw any earnings. You don't need to contribute to the account in each of those five years to pass the 5-year test; the account itself just has to be five years old.

23.4%

The percentage of accounts in the Employee Benefit Research Institute IRA Database that are Roth IRAs

Converting to a Roth IRA

Another way to fund a Roth IRA—regardless of income or marital status—is by taking some or all of the money from a different type of eligible retirement account, such as a traditional IRA or 401(k), and doing a Roth conversion. This process entails transferring assets from that other account to a Roth IRA, either a new one or an existing one.

Now for the bad news: You'll owe income taxes on the amount you convert at your marginal tax rate for that year. Does it make sense to take the tax hit on the conversion, even considering the tax-free withdrawals you’ll get later? It depends on what tax bracket you’re in now and what tax bracket you expect to be in when you take the withdrawals.

For example, let’s say you happen to be out of work at the moment and your income for the year will be quite low. Your marginal tax rate could be just 12%. It might be a good time to convert because, in retirement, you might be in the 24% tax bracket after adding up your various sources of retirement income.

if you have a traditional IRA that you’ve contributed post-tax dollars to, all or part of those funds would definitely be good candidates for this strategy, also known as a backdoor Roth IRA. However, you still may owe taxes on part of the conversion depending on your other retirement account holdings.

Roth IRAs and Social Security

There’s another benefit of contributing to a Roth IRA no matter how late in the game it is. Roth withdrawals aren't considered income for the purposes of determining whether you’ll have to pay taxes on your Social Security benefits, as traditional IRA and 401(k) withdrawals are. They also don’t count toward determining whether your income is high enough to charge you higher Medicare premiums.

Opening a Roth IRA can also be a way to leverage your Social Security benefits. Let’s say you’re still working when you reach the minimum age to start getting those checks (or electronic funds transfers). Claiming Social Security as soon as possible could be a good strategy—if it enables you to invest more. The result can be greater earnings—greater even than waiting until you’re older to claim larger Social Security benefits and spending the money right away, or having fewer years to invest it.

This isn’t a foolproof strategy, though. Its success depends on future investment returns and your time horizon. If retirement income is tight, this strategy might be too risky for you. The general rule of thumb is to not invest money in the stock market that you expect to need in the next 10 years.

But also keep in mind that you probably aren’t going to withdraw everything in your Roth at once. You may be able to take some stock market risk with investing money you won’t need to withdraw until you’re 70 or older (assuming you’re currently 60).

The Bottom Line

As people work later into life and live longer than ever before, they start questioning some of the conventional wisdom regarding retirement investing. One of those assumptions is that they're too old to open a Roth IRA.

True, they won't have as much time to build a heftier tax-free account balance until they retire. But that doesn't mean that a Roth IRA can't be the better choice for an older investor. Opening or converting to a Roth in your 50s or 60s can be a good choice when:

  • You no longer have earned income from work.
  • Your income is too high to contribute to a Roth through normal channels.
  • You want to avoid RMDs.
  • You want to leave tax-free money to your heirs (compared to letting them inherit a retirement account on which they would pay taxes on the distributions each year).