Retirement is a time in life that a lot of people look forward to. Life is a lot more relaxed after retirement as the stress and deadlines of work are no longer there. You can use this time to pursue hobbies, travel the world, catch up with friends and family, and live a relaxed and slow-paced life. However, the chances of all this turning into a reality depend on how well you plan your retirement.
If you consult a financial expert, read a financial blog, or speak to your seniors or peers, most people will advise you to start preparing for your retirement as early in life as possible. Ideally, your 20s are the best time to start saving and investing. A lot of people waste these years and come to realize the importance of saving in their 30s or 40s. However, getting a hold of your finances in your 20s can give you an edge. Unfortunately, the saying that life never goes on as planned is true to an extent. Not everyone can start retirement planning early in their career. Some people may struggle to earn enough, and others may lack the motivation. Many a time, the absence of adequate financial education also contributes to poor financial planning. However, as time catches on, you are left with no option but to take matters into your own hands.
The Roth IRA is a great retirement tool that can help you save for your golden years. If you wish to learn more about Roth IRAs and how to open one, reach out to a financial advisor who can guide you on the same. However, if you are late to saving and wondering if opening an IRA after age 60 is possible, here are some things you must know.
What is a Roth IRA?
Typically, there are multiple types of IRAs, like a traditional IRA, SIMPLE IRA (Savings Incentive Match Plan for Employees), SEP (Simplified Employee Pension) IRA, etc. A Roth IRA is one such type of individual retirement account. A Roth IRA offers the benefits of tax-free withdrawals in retirement. When you invest in a Roth IRA, you contribute your after-tax dollars. This money is not tax-deductible. As a result, you have no tax liabilities in retirement as long as you make qualified withdrawals. Roth IRA can be a good choice for people who think their income tax will be higher in retirement than it is in the present. You can open one with a bank or a brokerage firm, either online or offline.
Another thing to note is that with a traditional IRA or a 401(k) retirement account, you have to take out mandatory required minimum distributions (RMDs) after the age of 72 years. The first RMD must be made by April 1 of the following year you turn 72 years of age. However, there is no such rule for Roth IRA withdrawals. This makes a Roth IRA a more flexible retirement planning tool than its counterparts.
When can you open a Roth IRA?
There is no prescribed age to open a Roth IRA. You can open it whenever you want. Since there is no Roth IRA age limit, you can consider opening an IRA after age 60 too. If you are wondering how long you can contribute to a Roth IRA, the answer is as long as you want. However, you must be earning an income. A Roth IRA also has income limits. If you do not fall within these limits, you cannot open an account or contribute to one. As of the year 2021, here are the income limits for a Roth IRA:
- If you are a single tax filer, you can open a Roth IRA as long as you are earning a modified adjusted gross income (MAGI) of $140,000 or less.
- If you are a married tax filer filing jointly, you can open a Roth IRA as long as you are earning a joint MAGI of less than $208,000.
These income limits are only valid in 2021 and are expected to change next year. In 2022, the income range for single tax filers will be increased to $129,000 – $144,000. For married tax filers filing jointly, the limit increases to $204,000 – $214,000.
Having stated these limits, you must note that you can earn an income from anywhere. You can work full time or part-time. You can work for a company or have your own business. It does not matter. However, your investment returns, pension, dividends, or Social Security benefits do not count as an income. Even though some of these are included in your MAGI, they would not be counted when computing your income for a Roth account.
Is opening an IRA after age 60 a good idea?
Since there is no Roth IRA age limit, opening the account at any age can offer you several benefits. However, for those who wish to contribute to a Roth IRA after the age of 60, the account could bring some additional benefits such as:
- As of 2021, the annual contribution limits for a Roth IRA are different for people below the age of 50 and over the age of 50. If you are under the age of 50, you can contribute up to $6,000 to the account per annum. However, if you are over the age of 50, you can contribute an additional $1,000, bringing your contribution up to $7,000 towards the account per annum. This can be an added benefit for people over 60, as it lets you contribute more and ultimately accumulate more savings. If you are working beyond your 60s, you can take advantage of this option and save up a significant amount.
- All other accounts like a 401(k) and a traditional IRA have mandatory RMDs. However, a Roth IRA does not have this rule. So, even if you open this account after the age of 72 years, you would not be mandated to take any distributions. You can choose when you wish to use this money as per your needs. You can also choose to not withdraw your funds at all. The decision is entirely yours.
- Cashing out your IRA after 60 eliminates the scope of any penalties. Any withdrawals made before the age of 59.5 years incur a 10% penalty. However, once you are over the age of 60 years, you no longer have to worry about such rules. You can withdraw your money as you please.
- A Roth IRA can be passed down to your beneficiaries and heirs without any tax liabilities. People over the age of 60 years are anyhow encouraged to start paying attention to their estate plan. Opening an IRA after age 60 can help you with two things. The first is your personal goals and needs, and the second is your children and grandchildren’s needs. As an estate planning tool, the Roth IRA offers hassle-free transfers to your next of kin. Moreover, your heirs do not have to pay any tax on the Roth IRA income.
- You can open a Roth IRA for your spouse. The contribution limits for a spousal IRA is the same as the other Roth IRA. You can contribute up to $7,000 over the age of 50 years regardless of whether your spouse earns an income or not. However, if you want to contribute on behalf of your spouse, you still need to have an earned income.
What should you keep in mind before you consider opening an IRA after you turn 60?
While a Roth IRA offers several benefits, it may be better to keep the following things in mind before you open one:
- A Roth IRA has a five year rule. This means that you can only withdraw your money five years after contributing to a Roth IRA. This may not seem like a big restriction or drawback if you open your account at the age of 30 or 40, but it poses a greater inconvenience when you are older. If you open your Roth IRA at the age of 60, you would have to wait till you are 65 years old to be able to use this money. In the case of a financial emergency or even essential day to day monetary needs, the account would lose its value. Moreover, since time is often fleeting when you are older, the five year term can seem unfairly long. Hence, to ensure that you have financial liquidity in your later years, you would need to keep other sources of income active. If you have a part-time job and contribute to a Roth IRA from that money, you may have to withdraw from your other investment returns or pension accounts. This can help you cover your other expenses while your income from the job is contributed to your Roth IRA for your future goals. For those working full time, it may be easier to manage their finances even with the five year restriction.
- You have to be careful about what constitutes your MAGI. If you are withdrawing your Social Security benefits, they cannot be contributed to your Roth IRA because these are not considered to be a valid income. However, you can still use these options to maximize your Roth IRA contributions. You can start withdrawing your Social Security benefits as soon as possible. The benefits can be an added help in managing your day to day finances, so you use less of your income. The money that you save from your income can then be contributed towards the Roth IRA. Now there are two schools of thought here. The first one consists of investors who want to maximize their Social Security benefits by delaying their withdrawals. These investors do not withdraw their Social Security benefits at the full retirement age and instead wait. This helps them increase their Social Security check. The second group of investors recommends withdrawing your Social Security benefits at the earliest, so you can contribute more to your Roth IRA. The outcomes of both these choices can be different and unique in every situation. They would depend on the value of your contributions, the duration of the investment term, your overall financial standing and expenses, etc. There is no fixed approach that can suit everyone. So, it may be advised to analyze each situation carefully and make a decision based on what offers you better returns. It may also be recommended to consult a professional financial advisor and take an expert’s opinion on the matter.
- A Roth IRA may not be the only option at this age. If you are working in your 60s or later, you can still consider other options like a 401(k) workplace This will help you boost your savings even more.
- You can also convert your traditional IRA to a Roth IRA after the age of 60. However, you would still have to pay taxes on all the previous contributions made to the account. The account’s earnings will also be taxed.
- You can have multiple Roth IRAs, but the total contribution limits for a year cannot be exceeded. So, you have to be mindful of the limit for each year.
- Another important thing to know is that you cannot contribute more than you earn in a financial year.
Life over the age of 60 can be a bit challenging, given the reduced opportunities and piling expenses. Your health expenses take a major chunk out of your budget, and in most cases, it can be hard to find a job. However, if you do find the option to work post the official retirement age, you can consider contributing to a Roth IRA. With no Roth IRA age limit, this can be a simple and efficient way to safeguard your old age financially. Moreover, when you do so, you must also keep in mind that using your other pensionable income and Social Security benefits smartly is vital to maximizing your profits. If you need help with understanding how to use a Roth IRA after the age of 60 or how long you can contribute to a Roth IRA, you can get in touch with a financial advisor in your area.
For additional questions on the most suitable retirement strategies for your financial needs, visit Dash Investments or email me directly at email@example.com.