Are You Too Old to Open a Roth IRA?

The earlier you start a Roth IRA, the better. But even when you’re close to retirement, opening this special retirement savings vehicle can still make sense under some circumstances.

A Roth IRA is an individual retirement account (IRA) that allows certain distributions or withdrawals to be made on a tax-free basis, assuming specific conditions have been met. Unlike their traditional IRA counterparts, Roth IRAs are funded with after-tax dollars—they do not provide a tax deduction in the years you contribute money to them.

There is no age limit to open a Roth IRA, but there are income and contribution limits that investors should be aware of before funding one. Let’s look at the pros and cons.

How Roth IRAs Can Help Save for Retirement

Many people hit 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.

Perhaps 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. One of the benefits of a Roth IRA is that you’re never too old to fund it: There’s no age limit on making contributions to a Roth IRA.

Distributions from Roth IRAs

Also, 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.

There was one exception to this rule: The IRS didn’t require RMDs in 2020. On March 27, 2020, President Trump signed a $2 trillion coronavirus emergency stimulus package, called the Coronavirus Aid, Relief, and Economic Security (CARES) Act, into law. The act suspended required minimum distributions from retirement accounts in 2020. This provision was intended to give retirement accounts more time to recover from the stock market downturns, and for retirees who could 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.

Income Requirements for Roth IRAs

Although less restrictive than other accounts, Roth IRAs aren’t totally without limits. Regardless of your age, your income must be below a certain level for you to be eligible to contribute to a Roth. Also, contribution amounts to Roth IRAs can be limited or phased out. These limits depend on your tax filing status (i.e. single or married) and how much income you earn.

Income Limits

In 2021, individuals with single tax-filing status cannot contribute to a Roth if their income exceeds $140,000. Contributions for singles begin to get phased out—or are limited—if they earn in the range of $125,000 to $140,000. In 2022, the income phase-out range increases to $129,000 to $144,000.

For those who are married and file their taxes jointly, the Roth income phase-out range for 2021, it’s $198,000 to $208,000. It increases to $204,000 to $214,000 in 2022.

This rule can be a drawback 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).

Earned Income

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.

Contribution Limits for Roth IRAs

The annual contribution limit for Roth IRAs is $6,000 for 2021 and 2022. Individuals aged 50 and over can deposit an additional $1,000 as a catch-up contribution for a total of $7,000 per year.

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. In other words, the spouse can contribute a maximum of $14,000 if both spouses are 50 or older for 2021 and 2022, or $6,000 + $6,000 (each person’s contribution limit) + $1,000 + $1,000 (each person’s catch-up contribution).

That’s true even if only one spouse worked, or if both spouses worked, but one spouse earned less than the contribution limit. The deadline for making contributions for 2020 is April 15, 2021.

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 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 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.

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, unlike traditional IRA and 401(k) plan withdrawals. 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.

You probably aren’t going to withdraw everything in your Roth at once. You may be able to take some stock market risk by investing money you won’t need 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.

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