Are you too old to open a Roth IRA?
July 1, 2023
Many people intend to rely on their 401(k) plans offered through employment, personal savings and collecting Social Security and Medicare benefits during retirement, but financial advisors recommend diversifying your retirement plan to include a Roth IRA. Plus, if you’re not offered a 401(k) plan through work, Social Security and savings alone may not be enough. The first step in determining whether it’s too late to open a Roth IRA is understanding the potential benefits and downsides of having one.
Understanding the Roth IRA
The difference between a Roth IRA and a Traditional IRA is that a Roth IRA allows for tax-free income during retirement, while a Traditional IRA taxes withdrawals. With a Roth IRA, contributions are taxed upfront, so all withdrawals of earnings are federal tax-free once the account has existed for five years, and the account holder is at least 59½. Contributions, though, can always be withdrawn at any age without taxes or penalties, which could be especially important during unexpected financial hardship. For anyone new to investing or planning for retirement, IRA expert and accountant Ed Slott recommends starting with a Roth IRA, saying, “There’s just no question that that is the better place,” to start.
Opening a Roth IRA
In order to contribute to a Roth IRA, you must earn an income, but there are income limits. In 2023, a single person may make $153,000 or less, while those who file jointly may make $228,000 or less. While there are no RMDs, there is a Maximum Contribution allowed of $6,500 under the age of 50 and $7,500 for those 50 and over. That means that if you have extra income to invest between the age of 50 and 70, the Roth IRA might be just right for you. Contributions are not tax deductible and all earnings grow tax-free. Because Roth IRAs do not have Required Minimum Distributions (or RMDs) after the age of 73, this is yet another reason that it might be the perfect account to consider for someone who is older and may be behind on their retirement planning.
The Benefits to Opening a Roth IRA at an Older Age
The earlier you start saving for retirement, the better. With a Roth IRA, the longer the account is open, the longer someone has to save and take advantage of compound interest. Winnie Sun, managing director of Sun Group Wealth Partners says she always points young investors to Roth IRAs, because not only can it get them started on long term investing, but it can “help them sock away money that can be accessed in an emergency.” There are still advantages to opening a Roth IRA even at an older age, as long as an individual falls within the income and contribution limits. If you’re over the age of 59½ or getting there, then once the account has been open for five years, there will be no penalty for withdrawing earnings tax-free, and if you plan to continue earning past 73 or don’t need to withdraw funds at that time, then there will be no harm in not withdrawing a certain amount per year as Roth IRAs do not have RMD restrictions. While some people view the inability to claim contributions as a tax deduction as the downside to Roth IRAs, others argue that not having to pay taxes on your distributions is the upside to that later on. Perhaps the best way of looking at this feature is that retirees may leave their heirs tax-free funds, which may be particularly important for some people. Income, though, may be the most important factor in opening a Roth IRA later in life, as some individuals don’t earn more until they are older. It may not be until an older age that an individual has the extra income that they can now invest, especially once the mortgage is paid or their children are independent. Many find themselves in the unfortunate position of not having saved up what they’ll need, and so they’ll want to make the most of their earnings while they can; that’s when a Roth IRA can help.
The best thing to do when it comes to retirement planning is to start early, but because of various situations, this isn’t always possible for everyone. Even if an individual has been saving or has a decent 401(k) plan through their job, opening a Roth IRA at a later time can help many people plan on having extra funds during their retirement years. Insureyouknow.org can help you store all your retirement plans in one place so that your retirement accounts and other finances are easy to access and can be updated regularly. This way, you can focus on earning and enjoying your funds both now and later in life.