What Are the Age Limit Restrictions for IRA Contributions?
Setting up an individual retirement account (IRA) can be a great way to save for retirement. But how late is too late to start one, and what sort of age limits apply that could restrict your ability to save? Here we'll go over what you need to know if you're interested in investing in either a traditional IRA or Roth IRA. From minimum deduction requirements to helpful exceptions, use this overview of both types of IRAs and their rules and regulations to boost your understanding and better prepare yourself to save for retirement.
Traditional IRA vs Roth IRA: How Do They Compare?
Before reviewing the basics you need to know about starting or contributing to an IRA, it's important to understand the difference between a traditional IRA and a Roth IRA.
When you invest in a traditional IRA, you contribute pre-tax dollars, allow your investment to grow on a tax-deferred basis and eventually pay taxes on withdrawals you make when you start using the money in the account. When you set up a Roth IRA, you invest after-tax dollars and allow them to grow tax-free, which means that you won't pay taxes on later withdrawals you make after a certain age.
When you invest in a traditional IRA, you should also plan to wait until the age of 59 1/2 to begin making withdrawals from the account. Because IRAs are intended to serve as retirement accounts, you may have to pay an early withdrawal penalty on the investment if you take your money out sooner.
If you have a Roth IRA, you can withdraw the amount of money — called your contributions — you invested at any time, regardless of your age. If you want to withdraw any interest gains that you've earned on your investment — which are the Roth IRA’s earnings — you may be taxed on them if you take them out before you reach the age of 59 1/2. Once you reach that age, however, you can withdraw both your contributions and investment earnings with no penalties, as long as your account has been open for five years or longer.
Age and Contribution Limitations
Before 2020, you were only allowed to contribute to a traditional IRA until you reached the age of 70 1/2. The exception here was that you could still make rollover contributions at any time. Roth IRAs have never had any age restrictions, and individuals were allowed to contribute to them for as long as they wanted.
As of 2020, the IRS changed these restrictions and now allows contributions to both types of IRAs at any age as long as either the owner of the account or their spouse is still earning taxable income. That said, there is a limit on how much money you can contribute to an IRA account each year. If you’re under age 50, then $6,000 is the most you can contribute in 2021 to either a traditional IRA or Roth IRA. If you have both, then it's also the total amount that you can contribute between the two. If you’re over 50, however, the yearly limit rises to $7,000 in contributions annually. If you make less than your limit, then the most you can contribute equals your taxable compensation for the year.
Minimum Distribution Amounts
While you can keep investing in either type of IRA as long as either you or your spouse are employed, there's also something called minimum distribution that you’ll need to consider. This mostly applies to traditional IRAs.
Withdrawals never have to be made from a Roth IRA as long as the owner is alive. If the Roth IRA has been inherited or is part of a 401(k) designated Roth account, however, then the distribution rules may apply.
When it comes to traditional IRAs, you’re required to start taking withdrawals when you reach the age of 70 1/2. A slight amendment to this was made under the 2020 SECURE act, which allows you to hold off on making withdrawals until you’re 72 if your 70th birthday happened after July 1, 2019.
After you reach the specified age, you're required to start making minimum distribution withdrawals from a traditional IRA each year. While you don't have to take out more than your minimum required amount each year, you must take out at least that much or more. If you don't, then you may be subject to a 50% tax on the amount that you failed to withdraw. In order to figure out what your required minimum deductions are, visit the IRS website, which offers a number of tools and worksheets that can help you.
Contribution Limit Exceptions
There are two notable exceptions to IRA contribution limits. These apply when it comes to rollovers and transfers.
A rollover takes place when you transfer money from another type of retirement plan, such as a 401(k), into your IRA. You can do this at any age, and it doesn't count towards your contribution limit for that year.
Making a transfer simply means you’re moving money from one IRA into another IRA, and this doesn't count towards your contribution limit either. You can even convert money from a traditional IRA into Roth IRA assets at any time. The main element to keep in mind is that you'll want to leave enough money in your traditional IRA to meet your minimum distribution amount for that year.
The bottom line is that maximum contribution limits apply mainly to any new money (not money from another tax-deferred account) that you plan to invest. There are possible exceptions to this rule, however, which you can read about in IRS Publication 590-A.
IRAs for Non-Working Spouses and Minors
Under certain conditions, you can also make an IRA contribution on behalf of a non-working spouse. For example, say that a couple is married and files jointly on their federal income tax returns. Even if only one member of the couple is employed, each member of the couple can either open or contribute the maximum amount to their own traditional or Roth IRA that year. The only requirement is that the total contributions in both accounts can be no more than the maximum limit that’s based on the couple’s combined income.
When it comes to children, many parents wonder how soon they can help their kids set up their own IRAs. Generally, you can help your child open one as soon as they’re old enough to start working. There’s no minimum age requirement to open either a traditional or Roth IRA, as long as the minor has earned an amount of money that requires them to file taxes. They can contribute either as much as the maximum yearly contribution or as much as their total taxable income that year if it's less.