Many of us consider age 60 and beyond to be our golden years. At that age, our vision of how we plan to spend our retirement years usually becomes clearer. By then, we’ve hopefully socked away enough money to enjoy these much deserved years and devote more time to leisure activities.
But if you’re age 60 or older and are still working, you may be asking yourself whether or not it still makes sense to contribute to an IRA. If you plan to defer retirement longer or you find yourself in the position of having to play catch-up with your retirement accounts, then putting money into an IRA account may still make sense for a number of reasons.
The two most popular types of IRAs are traditional and Roth accounts. Both have certain tax advantages that you must carefully consider with respect to your current situation and your expected tax situation in retirement.
Traditional IRA contributions are taken pre-tax and are not counted as taxable income each year. Once placed into your account, contributions grow tax-deferred and are taxed as ordinary income when you withdraw money from the account.
Roth IRA contributions are made after-tax, and there is no deduction available when you file your taxes each year. However, growth realized while your money is in your account, as well as withdrawals, are tax-free.
Tax strategy is perhaps the most important consideration when choosing which type of IRA account to put your retirement savings in. The benefits of a traditional IRA currently are the annual tax-reducing benefits on earned income.
The logic behind choosing a Roth IRA is―as many financial and economic professionals believe―that income tax rates will likely continue to climb in the future. Having access to a retirement account that is generally not taxable, and therefore won’t bump you into a higher tax bracket, is a huge benefit.
The age at which you plan to take distributions from your IRA account should be an important consideration in how you decide to invest your money.
For example, with both types of IRA account you can start taking distributions at age 59½ without incurring a 10-percent penalty. However, that’s where the similarities stop, because a traditional account mandates that you take a required minimum distribution (RMD)1 at age 70½. The amount you take is also subject to current income-tax brackets, depending on your filing status, income for the year, and other factors.
A Roth account is exempt from RMDs, and withdrawals can be made penalty-free after five years and upon reaching age 59½. The withdrawals also generally do not add to your tax burden each year.
Know your contribution limits
Contribution limits to retirement accounts are fixed by the federal government. If you are single and earn less than $120,000 per year, or married filing jointly and earning less than $189,000, you can contribute up to $5,500 annually to either type of IRA account.
The good thing is, if you are age 50 or over, the IRS allows catch-up contributions of an additional $1,000 annually, making your total annual maximum contribution $6,500.
Easier access to your money
Unlike other types of investment accounts, such as certificates of deposit (CDs), money market accounts, bonds, and others that tie your money up for periods of a year or longer, an IRA account is generally much easier to access and withdraw from once your reach age 59½.
Another advantage of an IRA, as far as having access to your money, is that under certain circumstances, the IRS will allow distributions penalty-free if you qualify2. Certain financial accounts, such as CDs, typically do not allow for early withdrawal before the investment reaches its maturity date.
Saving for your retirement is almost always a good idea, regardless of whether it’s in a 401(k) or another type of growth account. The main point is to save as much as you can financially shoulder. However, an IRA account―especially at age 60 or older―can be a fairly risk-averse and tax-friendly way to save for your golden years.