Roth IRAs can provide significant tax benefits to young people. If you’re nearing the end of your career, you may be wondering if a Roth IRA is still a wise addition to your portfolio. It is possible to open a Roth IRA later in life and start saving. However, there are certain criteria you’ll have to meet in terms of income, the amount you can contribute and when you are eligible to make penalty-free withdrawals.
As you consider opening a Roth IRA close to retirement, you’ll want to know about:
— The Roth IRA income requirements.
— The tax benefits of a Roth IRA.
— Age considerations with a Roth IRA.
— The chance to pass funds to heirs.
[See: 10 Reasons to Save for Retirement in a Roth IRA.]
Roth IRA Requirements
There is no maximum age limit to contribute to a Roth IRA, so you can add funds after creating the account if you meet the qualifications. You can contribute up to $6,500 in 2023 or $7,500 if you’re at least 50 years old. In 2024, the contribution limit is $7,000, or $8,000 if you’re 50 or older. You’ll need to have the account open for at least five years to take penalty-free withdrawals in retirement. If you take out funds before then, you could face penalties.
When you make contributions to a Roth IRA, it must be with earned income. You might save some of your salary or wages from a job. The income will need to be actively earned, meaning it must come from compensation. Passive income, such as money received from rental investments, cannot be contributed.
If you are a single person, you can put funds in a Roth IRA if you earn up to $146,000 in 2024. After that, the amount you are eligible to contribute is phased out until your income exceeds $161,000, at which point you can no longer put money directly in a Roth IRA. For married couples, the income threshold to make full contributions is less than $230,000 in 2024, and if your joint income exceeds $240,000, contributions can no longer be made.
[Mistakes to Avoid With a Roth IRA]
The Tax Benefits of a Roth IRA
When you make contributions to a Roth IRA, the funds are taxed before they go into the account. “The major advantage of the Roth IRA is that qualified distributions are not considered taxable income, meaning both contributions and earnings are distributed free of income taxes,” said Nicole Birkett-Brunkhorst, a senior wealth planner with U.S. Bank Private Wealth Management in St. Louis, in an email. For distributions to be qualified, your Roth account must be at least five years old. In addition to the five-year rule, a qualified distribution must fit one of the following eligibility requirements:
— The owner is at least age 59 1/2.
— The original owner dies.
— The owner meets disability requirements.
— The distribution will cover qualified first-time homebuyer expenses of up to $10,000.
Age Considerations With a Roth IRA
While you could continue to work into your 70s and contribute to a Roth IRA, there are considerations before doing so. “The tax-free growth of Roth IRAs is more beneficial as the average rate of return and the holding period increase,” said Scott Butler, a financial planner and certified retirement counselor at Klauenberg Retirement Solutions in Laurel, Maryland, in an email. “Many are also at their highest income level and, consequently, higher tax brackets later in their careers.”
Since your contributions will be made with after-tax dollars, you could be paying more in taxes at a higher income level. If you exceed the income limits for contributions, you won’t be able to put funds in a Roth IRA. “These factors do generally make it more advantageous to contribute at younger ages,” Butler said. “However, for individuals who partially retire or pick up some part-time work after retirement, those years of lower taxable income may be good candidates for Roth IRA contributions.”
If you’re approaching retirement and do not have many tax-free dollars invested, a Roth IRA could be helpful. “With retirements lasting 30 years or more these days, even someone retiring today will need to be prepared to have assets they will not be using for a long time,” Butler said. “Roth dollars are great with that kind of time frame.”
You’ll also have some control over your future taxes, as withdrawals won’t be exposed to tax rate increases. If you have a large, unexpected expense early in retirement, you could use Roth dollars to cover the cost rather than pulling funds from an account that would be subject to taxes.
[READ: What Is the Roth IRA 5-Year Rule?]
The Chance to Pass Funds to Heirs
For pretax retirement accounts, including the traditional IRA or 401(k), required minimum distributions start at a certain age. Typically, after you turn 73, you’ll need to take out a certain amount each year. However, you don’t have to follow that plan with a Roth IRA. “Currently, there is no requirement for you to withdraw your money from a Roth IRA,” said Brian Dudley, senior vice president and financial advisor at Wealth Enhancement Group in Burlington, Massachusetts, in an email. The funds you don’t take out could be passed on to your heirs tax-free. “Your beneficiaries may be able to inherit your money while allowing it to continue to grow tax-deferred for up to 10 years, and then withdraw the funds tax-free,” Dudley said.
Can you be too old to open and contribute to a Roth IRA? According to Dudley, “No, as long as the move benefits you and your family.”
More from U.S. News
IRA Rules: Contributions, Deductions, Withdrawals
Mistakes to Avoid With a Roth IRA
IRA Versus 401(k): Which Is Better?
Are You Too Old to Benefit From a Roth IRA? originally appeared on usnews.com
Update 12/29/23: This story was published at an earlier date and has been updated with new information.
