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The Roth IRA is often touted as a great savings vehicle for younger investors. Since the money you put into a Roth IRA has already been taxed, young investors can put money aside while their income (and tax burden) is lower, then reap the benefits in the form of tax-free withdrawals in retirement.
But there is no age limit on Roth IRAs making good financial sense. In fact, since workers are allowed to contribute to a Roth IRA past the age of 70 and a half as long as they are still earning income, a Roth IRA is the only tax-advantaged investment vehicle available to those in their 70s and beyond.
If you’re wondering if you are too old or young to take advantage of a Roth IRA, remember that any age can be just right for investing in one.
How old do you have to be to open a Roth IRA?
As a tax-advantaged investment vehicle, Roth IRAs (like their traditional counterparts) have some strict eligibility rules. But unlike traditional IRAs, there are fewer age-related eligibility rules for Roth IRAs.
For instance, with traditional IRAs, investors over the age of 70 and a half are prohibited from making contributions, whether or not they are still earning income. In addition, traditional IRA account holders must begin taking required minimum distributions (RMDs) as of age 70 and a half, while Roth IRAs have no such distribution requirement and you may leave money in a Roth account for as long as you live.
The only age-related rule that both Roth and traditional IRAs share is the age at which account holders may begin making withdrawals without facing a penalty. In both cases, that age is 59 and a half. Until you reach that magic number, both Roth and traditional IRA distributions will be subject to the 10% tax penalty. In addition, you cannot take a penalty-free distribution from your Roth IRA earnings if it has been less than five years since you opened it.
No matter your age, as long as you have earned income, you can open a Roth IRA. However, your total modified adjusted gross income (MAGI) will help determine how much you can set aside in your Roth IRA. In 2019, the contribution limit for both traditional and Roth IRAs is $6,000, rising to $7,000 for filers who are age 50 or over. It’s important to remember that this contribution limit is applied to all of your IRA accounts if you have more than one. This means your total contributions to all of your traditional and Roth IRAs cannot be more than $6,000.
Taxpayers who are married filing jointly can contribute up to the maximum amount to their Roth or traditional IRA if their MAGI is below $193,000. A married couple can contribute a reduced amount if their MAGI falls between $193,000 and $203,000, and couples earning more than $203,000 may not contribute to a Roth IRA in 2019. Single filers are eligible for a full contribution up to a MAGI of $122,000, a reduced contribution between $122,000 and $137,000, and may not make a contribution with a MAGI above $137,000.
Basically, as long as you make at least $6,000 and make no more than the MAGI limits for your filing status, you can contribute the full amount to your Roth IRA, no matter your age.
Roth IRA benefits for young contributors
- Pay taxes at a lower level: Provided you wait until age 59 and a half (and own the Roth IRA for at least 5 years before making a distribution), you can access the money in your Roth IRA tax-free. This means a younger contributor could pay a lower amount in taxes on that money, since their tax bracket is likely to be lower now than it will be later in their career or even in retirement. In addition, since it’s impossible to know exactly what kind of tax burden you will be facing in retirement, having money in a tax-free vehicle provides you with a hedge against future taxes.
- Compound interest: In addition to your distributions being tax-free in retirement, your contributions grow tax-free, which means you get to enjoy all of the gains from your investment in retirement instead of having to see some of those gains lost to taxes. The other benefit of compound interest is the fact that it can make even modest early contributions grow to something quite robust.
- Future income hedge: If you expect to eventually make too much money to contribute to an IRA, investing in a Roth IRA early in your career can guarantee you the benefit of compound interest and tax-free growth even after you stop being eligible to contribute.
- Access your contributions tax-free: While you would have to pay taxes and penalties on withdrawals from your gains in a Roth IRA, the amount that you contributed can be withdrawn tax- and penalty-free, because that money has already been taxed. This makes the Roth IRA a much more flexible account than other tax-advantaged retirement accounts.
Roth IRA benefits for older contributors
- Diversify your retirement income Social Security benefits, pension benefits and withdrawals from traditional IRAs and 401(k)s are all subject to taxation in retirement. In fact, the amount of taxes you will owe on your Social Security benefits depends in part on how much income you have from your pension, traditional IRA or 401(k). By having a Roth IRA set up so that you have a source of tax-free income in retirement, you can give yourself a little more control over your tax burden.
- Estate planning: Since you are not required to take distributions from your Roth IRA as of age 70 and a half, you can use your Roth IRA as a method of passing money along to your heirs tax-free. By naming your heir as a beneficiary of your Roth account, the money could pass to your heir without being subject to estate taxes. Do note that inherited IRAs are subject to required minimum distributions, even in the case of Roth IRAs.
- Compound interest is still your friend: Because you are not required to take required minimum distributions as of age 70 and a half, older Roth IRA contributors can get the benefit of compound interest in ways that they could not with a traditional IRA. Even if you do not open a Roth IRA until after age 40, 50, or later, you can leave the money in the account for as long as you like, potentially giving it decades to grow before you access it. A traditional IRA puts a cap on that potential for growth by forcing you to take RMDs as of age 70 and a half.
- Backdoor Roth conversions can open up your eligibility: Even if you make more than the income limit for contributions, it is possible to convert your traditional IRA into a Roth account using what’s called a “backdoor Roth conversion.” Before you convert your entire traditional IRA, don’t forget that you’ll owe taxes on any pre-tax money and growth that gets transferred to your Roth IRA.
- Catch-up contribution limits: Investors over the age of 50 may contribute a full $1,000 more per year than those under the half-century mark. This means an older Roth IRA contributor can set aside $7,000 in 2019.
The bottom line
There’s no one right time to open up a Roth IRA. Whether you are a fresh-faced recent college grad or the grizzled veteran at your workplace, you can benefit from a Roth IRA. Just make sure you understand the potential advantages and disadvantages of setting aside already-taxed money into a Roth IRA.