The earlier you start a Roth IRA the better, but opening a Roth IRA when you're close to retirement can still make sense under some circumstances.
Many are at their peak earning years late in their careers. You might find you have extra money available to invest after the mortgage is paid off and the kids have finished college. You’ll want to make the most of that money.
Or, you might simply realize your retirement savings calculations are coming up short. Don't feel bad: Whether it's the cost of living, poor investment performance, or just stuff happening, many people find they have saved far less than they need.
In any case, 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). It's 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.
- You're never too old to fund a Roth IRA.
- Opening a later-in-life Roth IRA means you don't have to worry about the early withdrawal penalty on earnings if you're 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
First things first: You aren’t too old to contribute. There is no age limit on making contributions to a Roth IRA.
The percentage of Roth IRA investors who are under age 45, according to the Employee Benefit Research Institute (EBRI) IRA Database.
And there is no requirement for when you must begin withdrawing money from a Roth IRA. Again, that's in contrast to a traditional IRA, which mandates required minimum distributions (RMD) beginning at age 72, in amounts based on your life expectancy and your account balance.
Except: The IRS doesn't require RMDs in 2020. On March 27, President Trump signed a $2 trillion coronavirus emergency stimulus package, called the CARES (Coronavirus Aid, Relief, and Economic Security) Act, into law. This suspended required minimum distributions from retirement accounts in 2020. This gives those accounts more time to recover from the stock market downturns and retirees who can afford to leave them alone, the tax break of not being taxed on mandatory withdrawals.
But other than in 2020, if you don't want to be forced to withdraw money from a retirement account at age 72, the Roth IRA is your only choice.
But There Are Income Limits for Roth IRAs
Although less restrictive than other accounts, Roth IRAs aren't totally without limits, however.
Regardless of your age, your income must be below a certain level for you to be eligible to contribute to a Roth. That level depends on your tax-filing status. The details for the 2019 tax year and the 2020 tax year are available on the IRS website.
Just as an example, if you’re married filing jointly and your modified adjusted gross income (MAGI) was higher than $203,000 in 2019, you can’t contribute anything to a Roth IRA for 2019. If it was 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. The deadline for making contributions for 2019 is April 15, 2020.
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 and 2020, the contribution limit is $6,000, but those age 50 and over can contribute an additional $1,000.
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 counts towards your modified adjusted gross income (MAGI), and your ability to qualify for a Roth. However, 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. That's $14,000 if both spouses are 50 or older for 2019 and 2020.
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 with the 10% early withdrawal penalty. (This penalty was suspended for 2020 as part of the coronavirus stimulus bill.) 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 five-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 have to contribute to the account in each of those five years to pass the five-year test. The account itself just has to be five years old.
The percentage of accounts in the EBRI 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 converting it to a Roth. 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.
Let’s say, for example, that 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, after retirement, you might be in the 24% tax bracket once you add up all your sources of retirement income.
If you have a traditional IRA to which you’ve contributed post-tax dollars, 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, whereas 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 be a way to leverage your Social Security benefits, too. 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 in which to invest it.
This isn’t a foolproof strategy, though. Its success depends on future investment returns and your time horizon. If you expect your retirement income to be tight, this strategy might be too risky for you.
The general rule of thumb is not to 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.
The Bottom Line
As people work later into life and live longer, they may 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 until retirement to build a heftier tax-free account balance. 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.