Consider the benefits of investing in a Roth IRA, even if you are nearing retirement Part of the Series What 50-Year-Olds Need To Know About Roth IRAs
A Roth IRA is a type of individual retirement account (IRA); contributions to one are made with after-tax dollars, and investment growth is tax-free. Since contributions are made with post-tax money, there is no upfront tax deduction in the year of contribution. However, this arrangement allows for tax-free withdrawals of earnings during retirement if the account holder is at least 59½ years old and has held the Roth IRA for a minimum of five years; this five-year period begins at the start of the year for which a contribution was made to this or any other Roth IRA the account holder owns.
Because contributions are made with after-tax funds, you are allowed to withdraw contributions without incurring taxes at any time, regardless of age. Moreover, earnings can be withdrawn tax-free after the five-year holding requirement and upon reaching 59½ years of age. That is especially advantageous if the retiree falls into a higher tax bracket. It should be noted that there are no mandatory distribution requirements for a Roth IRA. This feature makes the Roth IRA an effective tool for estate planning, as it allows the account to be transferred tax-free to beneficiaries without required minimum distributions (RMDs) for the original account owner. While the RMD rules do apply to any heirs, their withdrawals of contributions are exempt from taxation. So are their withdrawals of earnings if the account is at least five years old.
Let’s face it – everyone talks about how amazing Roth IRAs are. Tax-free growth! No required minimum distributions! A financial miracle for retirement planning! But here’s what most financial advisors don’t tell you upfront Roth IRAs aren’t the right choice for everyone especially as you get older.
I’ve spent years helping folks navigate retirement planning, and I can tell you that one of the most common questions I get is about age and Roth conversions. The truth is, if you’re over a certain age, jumping on the Roth bandwagon might actually hurt your retirement more than help it.
In this article we’re gonna break down the age factors that determine whether a Roth IRA makes sense for your situation and I’ll show you exactly when this popular retirement vehicle might actually be driving you in the wrong direction.
The Magic Number: When Age Makes Roth IRAs Less Attractive
If your age is greater than 50, it likely doesn’t make sense to convert because there is not enough time to allow the Roth IRA growth to exceed the tax cost today.
That’s the hard truth many financial advisors dance around. But why is 50 such a critical threshold? Let’s dig deeper.
The Time Value of Roth Conversions
When you convert traditional IRA funds to a Roth IRA, you’re essentially making a bet that:
- You’ll be in a higher tax bracket in retirement than you are now
- The tax-free growth will outweigh the immediate tax hit
- You have enough time before retirement for this math to work in your favor
As we age, especially past 50, the third factor becomes increasingly problematic. The math simply doesn’t work out as well because:
- You have fewer years for tax-free growth to compound
- You’re closer to actually needing the money
- The immediate tax hit has less time to be “paid back” through tax-free growth
Six Reasons Roth Conversions Don’t Make Sense (Especially for Older Savers)
Let’s explore the specific reasons why a Roth IRA might not be the smart choice as you get older:
1. You’ll Be in a Lower Tax Bracket in Retirement
This is a huge consideration that many people overlook. If you’re currently in your peak earning years (which many people are in their 50s and early 60s), you’re probably in a higher tax bracket now than you’ll be in retirement.
Think about it – if you’re making $150,000 now but expect your retirement income to be $70,000, why would you want to pay taxes at your current higher rate?
For example, if you’re living in New Jersey where you pay 6.37% state income tax, but plan to retire to Florida with no state income tax, converting to a Roth means paying unnecessary state taxes!
Similarly, Georgia residents under age 62 should think twice – Georgia offers a retiree income exclusion starting at age 62 that gets even better at age 65, reaching up to $65,000 per year per person.
2. You Don’t Have Enough Cash to Pay the Conversion Tax
This is a practical issue that gets worse as you age. Converting to a Roth means paying taxes now instead of later.
Let’s say you want to convert $100,000 from a traditional IRA to a Roth IRA and you’re in the 24% tax bracket. You’ll need $24,000 in cash to pay the taxes. If you’re younger, you might have decades to save up this cash. But as you approach retirement, coming up with large sums for taxes becomes more difficult.
If you use funds from the IRA itself to pay the tax, your new Roth IRA will start with just $76,000 instead of $100,000 – a huge handicap! Even worse, if you’re under 59½, you’ll face an additional 10% penalty on the money used to pay taxes.
3. You Might Need the Money Within Five Years
Roth conversions come with some tricky “five-year rules” that can bite older investors:
For those under 59½, a five-year “clock” starts on January 1 of the year you convert funds. Taking distributions before this period ends triggers a 10% early withdrawal penalty on the principal.
For the earnings to be tax-free, you must wait five years from when you first established any Roth IRA, plus be at least 59½ years old.
If you’re already in your late 50s or 60s and might need the money soon, these rules can create problems.
4. You Plan to Leave Your IRA to Charity
Many of us have charitable intentions with our retirement savings. If that’s you, converting to a Roth IRA makes little sense – especially as you age.
Why? Because charitable organizations don’t pay taxes on traditional IRA distributions anyway! By converting to a Roth and paying taxes now, you’re essentially reducing the amount that will ultimately go to charity.
This consideration becomes more relevant as we age and finalize our estate plans.
5. Your Beneficiaries Will Be in a Lower Tax Bracket
If you’re over 50 and planning your estate, consider your beneficiaries’ tax situations. If they’ll likely be in lower tax brackets than you are now, it makes more sense to leave them a traditional IRA where they’ll pay taxes at their lower rates.
Remember that under the SECURE Act, most non-spouse beneficiaries must empty inherited IRAs within 10 years. Your heirs might have only a decade to spread out the income, whereas you might have more time to plan.
6. Your Estate Isn’t Large Enough to Worry About Estate Taxes
Roth conversions can make sense for those with estates large enough to face estate taxes. By paying income tax on the conversion, you reduce your estate size and potentially lower estate taxes.
But with the federal estate tax exemption at $11.58 million per person in 2020 (scheduled to return to $5 million adjusted for inflation after 2025), most people don’t need to worry about this.
If your estate isn’t near these levels, a Roth conversion for estate tax planning doesn’t make sense – especially if you’re older and the conversion would push you into a higher tax bracket.
Alternatives to Consider Instead of a Roth IRA After 50
So if a Roth IRA isn’t the right move as you get older, what should you consider instead? Here are some alternatives that might make more sense:
Traditional IRA
A traditional IRA allows pre-tax contributions that grow tax-deferred until withdrawal. The benefit? It reduces your taxes NOW rather than in the future. For older savers, this immediate tax break can be more valuable than potential tax-free withdrawals years later.
Yes, you’ll eventually face required minimum distributions (RMDs) starting at age 73, but that might actually align well with your retirement income needs.
Brokerage Account
As you get older, flexibility becomes more important. A regular brokerage account gives you access to the same investments as an IRA without the withdrawal restrictions.
While you’ll pay taxes on investment earnings, you won’t be forced to take RMDs, and there’s no penalty for “early” withdrawals. This liquidity can be particularly valuable for high-net-worth individuals approaching or in retirement.
High-Yield Savings Account
For the most conservative option, consider a high-yield savings account. These accounts generate higher interest rates than regular savings accounts and provide easy access to your funds.
As you age, shifting some retirement savings to more conservative, liquid options can make sense – especially for money you might need in the near future.
The Bottom Line: It’s About Your Timeline, Not Just Your Age
While I’ve emphasized that Roth IRAs often don’t make sense for those over 50, the reality is that your specific circumstances matter more than any rigid age guideline.
Here’s a simple way to think about it:
- Under 40: Roth IRAs typically make sense due to long time horizon and potentially lower current tax rates
- 40-50: Needs careful analysis based on expected retirement age and income
- Over 50: Usually doesn’t make sense unless special circumstances exist
- Approaching retirement (5 years or less): Almost never makes sense due to insufficient time for tax-free growth to overcome immediate tax costs
Remember, the right retirement strategy isn’t about following trends – it’s about what works for YOUR specific situation, timeline, and tax circumstances.
Final Thoughts: Making the Right Choice for YOUR Retirement
I’ve seen too many clients blindly follow the “Roth is always better” advice without considering their age and timeline. Don’t make that mistake! The financial industry loves to promote Roth conversions because they generate fees and commissions, but that doesn’t mean they’re right for everyone.
If you’re over 50, approach Roth conversions with extreme caution. The tax hit today might never be offset by the benefits if your timeline isn’t long enough.
Remember, retirement planning isn’t one-size-fits-all. What works for a 35-year-old rarely makes sense for someone who’s 55. Be smart about your retirement strategy, and don’t let the Roth hype cloud your judgment.
Have you considered a Roth conversion? What age factors influenced your decision? I’d love to hear your experiences in the comments below!
Understanding a Roth IRA
A Roth IRA is a type of individual retirement account that gives the account owner tax-free growth on invested funds. Individuals invest using money that they have already paid taxes on, so there is no up-front tax deduction. But in addition to tax-free growth, investors can pull out invested funds at any time without a tax penalty. Furthermore, you can withdraw any earnings in your Roth tax-free when you reach at least 591⁄2 years of age and have owned this or any other Roth IRA for at least five years. Roth IRAs are special retirement accounts because required minimum distributions (RMDs) do not apply to them. That makes Roth IRAs great estate planning tools. You can pass your Roth IRA to beneficiaries tax-free as long as you, the original owner, had the account for at least five years before passing away and the beneficiary obeys certain rules. For example, a non-spouse beneficiary must empty the account within 10 years of the original account owner’s death. A spousal beneficiary faces no such deadline for emptying the inherited Roth IRA and is not subject to RMDs while they’re alive.
By contrast, a traditional IRA gives the account owner an upfront tax break because you are investing with pretax funds. This means that you will pay tax on all withdrawals from this type of account during your retirement years. It is important to note that your tax deduction may be reduced or phased out if either you or your spouse are covered by a retirement plan at work. While you are able to withdraw funds from your traditional IRA at any time, the amount withdrawn will be included in your regular income for tax purposes, as well as possibly incurring a 10% penalty if you are under age 59½. Generally, you will be required to start taking RMDs at age 73, although if you are actively employed and participate in your employer’s workplace retirement plan, you may be able to delay taking distributions until the year that you retire.
Benefits of Opening a Roth IRA Later in Life
The Roth IRA has some unique attributes that can make it especially appealing for older adults. There are no required minimum distributions at any age, which makes this type of investment account a very good tool for investors who want to continue the benefit of tax-free growth even as they advance through their seventies, especially if it is money that they hope to pass to beneficiaries tax-free. In this way, it is a great option for older investors who want to use this as an estate-planning tool and do not intend to withdraw the funds themselves. While the account owner can avoid required minimum distributions (RMDs), their heirs may be subject to RMDs.
At What Age does a Roth IRA not Make Sense?
FAQ
Is a Roth IRA right for You?
The Roth IRA is a popular retirement savings tool often touted as the best option for young workers. But every tax advantage has a trade-off, which means Roth IRAs may not be right for everyone. Roth IRAs offer no tax benefits in the year you contribute. But you can get tax-free withdrawals during retirement if certain conditions are met.
What is the age limit for a Roth IRA?
There’s no age limit for contributing to a Roth IRA as long as you have earned income. You can withdraw tax-free earnings after you turn 59½, provided the account has been open for at least five years. Income and contribution limits apply, and exceeding them may require strategies like a backdoor Roth IRA.
Is it too old to open a Roth IRA?
The good news is that you’re never too old to open a Roth IRA, and depending on your situation, it might be a smart move—even if you’re close to retirement or already retired. A Roth IRA is a retirement account that lets your money grow tax-free.
What happens if you convert a Roth IRA early?
Penalties from early Roth conversions. For anyone under the age of 59½, a five-year “clock” starts on Jan. 1 in the year funds are converted to a Roth IRA. If you take a distribution from the new Roth IRA within this five-year window, a 10% early withdrawal penalty is charged on the principal (we’re not talking about earnings yet).
When can I withdraw money from a Roth IRA?
Say you open a Roth IRA at age 60 and make your first contribution in 2024. You would need to wait until 2029 to withdraw earnings tax-free, even though you’re over 59½. However, you can withdraw contributions anytime without taxes or penalties.
Do traditional IRA contributions make sense later in life?
Traditional IRA contributions later in life may also make sense if the individual earns too much to contribute to a Roth IRA directly; in that instance, the contributor can take advantage of the “backdoor Roth IRA” maneuver, funding the traditional IRA and then converting to Roth.
When should you not invest in a Roth IRA?
A person can not invest in a Roth IRA if the person is 70 and over or they are not earning money. A person can only invest the amount they earn or less each year. It is best to go on the internet and search for information on Roth IRA;s.
At what age should I stop contributing to a Roth IRA?
Roth IRAs: Like their traditional counterpart, there is no age limit for Roth IRA contributions. So long as you or your spouse earns income, you can continue to make contributions indefinitely. There are no RMDs with Roth accounts. However, beneficiaries of inherited Roth IRAs may need to take RMDs to avoid penalties.
Does it make sense to do a Roth conversion at age 70?
There’s no age limit for Roth conversions; they can be beneficial even in your 70s. Roth conversions offer tax-free inheritance and flexible retirement planning. Consider the immediate tax impact and uncertainty of future tax rates before converting.
Does it make sense to start a Roth IRA at 60?
It is never too late to open a Roth IRA. Anyone can open and start contributing to a Roth IRA at any time. There are several benefits for investors to assess, including tax-free growth, the absence of required minimum distributions, and the ability to pass assets along to beneficiaries tax-free.