Should You Still Contribute to a Roth IRA If You Are Nearing the Retirement Finish Line?

A Roth IRA (individual retirement account) allows you to build a portfolio of tax-free income during retirement. And you don’t have to worry about age getting in the way of contributing to the account. If you have earned income and your income doesn’t exceed the annual threshold, you can stash money away in a Roth IRA.

If you’re nearing retirement, a Roth IRA may help you achieve your goals faster. Here are a few things to consider if you’re thinking about contributing to a Roth IRA before retirement.

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Check your contribution cap and income eligibility

Roth IRAs can be a smart choice if you expect to pay higher taxes in the future. You can fund your Roth IRA with after-tax dollars now and lock in some tax-free income that you can use during retirement.

A Roth IRA also comes with higher contribution limits after you turn 50. This can be a great perk if you’re seeking to beef up your retirement portfolio. You can contribute an extra $1,000 to your Roth IRA when you hit 50. For 2022, that comes out to a contribution cap of $7,000. This gives you more money to invest in your favorite assets and grow your tax-free retirement portfolio.

But you have to meet income requirements to join the Roth IRA contribution club. First, you need to still have earned income from a job or other work. Also, your contribution limit depends on your tax filing status and your modified adjusted gross income (MAGI). If your filing status is single for 2022, you won’t be able to contribute the maximum amount to a Roth IRA if your income is between $129,000 and $144,000. And you won’t be able to contribute any money to a Roth IRA if your modified adjusted gross income (MAGI) jumps over $144,000.

Here are the Roth IRA phaseout ranges you should be aware of if you want to contribute to the account.

Filing Status

2022 Income Phaseout Range

Single or head of household

$129,000 to $144,000

Married filing jointly

$204,000 to $214,000

Data source: IRS.

Skip required minimum distributions

RMDs (required minimum distributions) can be a thorn in the side of those who already have a nice stream of income going into their bank accounts every year or don’t need to withdraw the money in their retirement accounts yet.

The IRS requires individuals with certain types of retirement plans — such as a traditional IRA — to start withdrawing money from their account at age 72. This mandate is called a required minimum distribution. When you withdraw money from your traditional IRA during retirement, you’ll be taxed at your ordinary income tax rate.

The RMDs from other retirement plans make a Roth IRA even more appealing. With a Roth IRA, you can have money in your account that is 100% tax-free during retirement, as long as you meet the requirements. You won’t be required to withdraw money when you turn 72. This gives you the opportunity to take advantage of compound interest over a longer period of time.

Pass on money to your heirs

Let’s say you build a $1 million Roth IRA. Since a Roth IRA doesn’t come with RMDs, you won’t be required to withdraw the money at a specific age. You can choose to take money out of the account when you’re 80 or 90 years old. It’s up to you. All the money will be tax-free when you make a qualified distribution.

But if you don’t use all the money in your Roth IRA while you’re alive, you can pass it on to your heirs. This is one way to make sure your family can build wealth when you are no longer around. Generally, heirs can make withdrawals from a Roth IRA over 10 years without having to worry about taxes.

Determine if a Roth IRA makes sense for you

A Roth IRA comes with a bundle of perks such as tax-free income during retirement and no required minimum distributions.

But you have to determine if it makes sense to pay taxes on your retirement money now or pay it later. You also want to make sure you qualify to make contributions. Check your income eligibility every year to determine if you can make direct contributions to a Roth IRA. The contribution cap goes up when you turn 50, which gives you more money to invest in assets that can grow tax-free and fund your dream lifestyle during retirement.

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