Are You Too Old to Open a Roth IRA?

Roth IRAs have been marketed as the retirement account for young savers. But it can also be a good option for more mature investors.

Unlike the traditional IRA, where contributions aren't allowed after age 70½, you’re never too old to open a Roth IRA. As long as you’re still drawing earned income and breath, the IRS is fine with you opening and funding a Roth.

Eligibility rules still apply

Even though age isn’t an issue in the Roth decision, there are other factors that will determine how much you’re allowed to stash in a Roth during any given year.

To be eligible, the following must apply:

You must have earned income. That means making money from a job (full-time, part-time or working for yourself). The job part is an important distinction since income from investments, a pension or Social Security don’t count.

But you can’t earn too much. The main roadblock savers face with the Roth is their modified adjusted gross income level. The more money you make, the less you’re allowed to contribute to a Roth IRA, until eventually the IRS completely closes off access.

For example, if you’re married and file jointly, the amount you’re allowed to save in a Roth starts decreasing if your modified adjusted gross income exceeds $189,000 in 2018. The same is true for a single or head of household filer whose income is more than $120,000. Eventually, eligibility phases out completely. See if you qualify to contribute to a Roth IRA.

Reasons to consider a Roth later in life

Eligibility issues aside, is contributing to a Roth really worthwhile to someone nearing or in retirement? The answer is "yes" if you’re a septuagenarian seeking to boost your tax-advantaged savings.

As noted previously, the IRS doesn’t allow contributions to a traditional IRA after age 70½, making a Roth your only IRA option past that point.

And there are other reasons a Roth IRA may be attractive to older workers who are still young enough to contribute to either kind of IRA:

A Roth provides a tax-free retirement income stream, adding diversity to the pools of money from which you draw income. Qualified withdrawals from a traditional IRA are taxed at your income tax rate at the time you take them.

This is one of the reasons why the Roth is so attractive to younger investors who haven't yet entered their peak earning years: They will likely be in a higher tax bracket in retirement, making tax-free withdrawals more beneficial then.

There is no requirement to start taking distributions at any time. With a traditional IRA account holders must take required minimum distributions (RMDs) every year starting at age 70½. Failure to take RMDs on time will result in a 50% excise tax on the amount you weren’t supposed to let linger.

With the Roth, there are no RMDs as long as you are alive and the account hasn't been passed to your heirs. (RMDs do apply, however, to non-spouse beneficiaries as discussed in more detail below.) If you don’t need the money yet, forget to take it or want to let the investment returns continue to marinate, go right ahead and let your money ride.

Beneficiaries receive a tax-free inheritance — so long as they follow the rules. As an estate planning tool, the Roth rocks, especially as a way to pass along all of the benefits of the account to a surviving spouse and their heirs.

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Spouses are allowed to transfer (or “assume”) the Roth IRA as their own and let the money stay in the account as long as they like (no RMDs!) to pass along to the next generation when they die.

Roth distribution rules are different for non-spouse beneficiaries. The tax-free withdrawal status still applies, but heirs are required to start taking distributions in a timely manner. (We’ve detailed all your options if you’ve inherited an IRA.)

You can withdraw contributions tax- and penalty-free at any time. One of the major perks of a Roth is that contributions can be withdrawn at any time and for any reason. Age isn't a factor: You can be 18 or 81, and if money is needed and you can’t cover it with what’s in your short-term reserves, you can take it out of your past Roth contributions.