Am I Too Old to Start an IRA? : Financial Stress

There’s no perfect age to start saving for retirement. Conventional wisdom is always that the earlier you start, the better off you’ll be. You’ve probably heard it ad nauseam before. However, not all of us start saving when we turn 18. Even if our first job has a 401k, we don’t always start investing in it. Debt and other life priorities can eat up our paychecks before we ever get around to investing. You may even be asking yourself if you’re too old to start an IRA.

Let’s demystify what it’s like to start investing later in life. If you’re in the middle of your career and wondering, we’ll cover how to play catchup.

What is an IRA?

An IRA, or individual retirement account, is a personal investment account. There are two types of IRAs; Roth and Traditional.

A Roth IRA lets you invest post-tax income. Because you paid tax on this money already, when you withdraw it after retirement there are generally no taxes or penalties when you withdraw from after age 59 ½.

A traditional IRA is different from a Roth. It lets you invest pre-tax income or post-tax income. You’ll then get taxed at your current income rate when you withdraw the funds after age 59 ½.

Is it Too Late to Start an IRA?

The short answer is NO. The sooner you start investing for your future, the better. But there’s never a date where it becomes too late for you to start saving for retirement. In fact, here are 4 reasons it’s not too late to consider an IRA:

Reason One: Income Limits of Investing Later

If you’re over the age of 50, you’re actually in luck! Some laws make it possible for you to contribute extra to your retirement. The current limits for both traditional and Roth IRAs are $6,000 per year per person. This limit is $12,000 for couples who file taxes together.

But wait! You can contribute $7,000 per year per person if you’re over the age of 50. That’s an extra $1,000 per year. Even better, 401(k), 457, and 403(b) plans allow for even more contributions. If you’re 50+, these plans allow you to contribute an extra $6,500 each year. That’s in addition to the $19,500 limit to those plans.

Reason Two: Compound Interest is Still Your Friend

Compound interest is the single reason starting to save for retirement early is the best way to help your money grow. But if you’re getting a late start on saving, you can still harness the potential of compound interest!

Let’s pretend you’re 58 years old right now and plan on retirement at 65. You have no current retirement savings.If you’re able to contribute $1,500 per month to your retirement fund until you retire, you’ll likely have about $160,0000 saved. That’s assuming an 8% average rate of return. Now, if you’re able to start saving a little earlier and push off your retirement until age 67, those numbers balloon in size. Let’s say you instead start at age 56 and don’t retire until 67. In that scenario, your investment doubles to nearly $300,000 in projected savings. Compound interest needs some time to get going. But once the momentum is there, it quickly becomes your friend. =)

Reason Three: Diversifying Your Portfolio

When building a retirement portfolio as you get older, we recommend talking to an investment advisor. They can help you diversify your portfolio. This means choosing investments that are at an appropriate risk level for your lifestyle. Riskier investments make sense when you’re young and you can ride the waves of the market. However when you get older, your investments need to provide both a steady income through dividends and gains in value. You won’t pull all of your money out of your investments on the day you retire. By staying vested, your investments can continue to earn money as you live.

Reason Four: Your Income Potential Doesn’t Disappear

Finally, retirement doesn’t always mean your earning potential disappears. Ask anyone to picture a typical retirement and beaches and Mai Tais likely come to mind. But we can assure you that this is a myth. Your retirement is whatever you make of it. It could be turning your hobby into a side hustle. It could mean garage sale flipping. Retirement doesn’t have to mean your ability to earn money goes away. There’s always a chance you’ll find something passionate to sink your teeth into after you call it quits from the 9 to 5.

When a Roth IRA Doesn’t Make Sense

Now, there are some unique instances when a Roth IRA doesn’t make sense. They have to do with how much you earn.

If you’re already in one of the highest tax brackets, your tax rate when you retire may go down. Because of how Roth IRA and traditional IRAs are structured, how you pay taxes changes. If you think your earning potential will go down later in life, it’s smarter to use a traditional IRA than a Roth IRA.

That’s because Roth IRAs are for post-tax income. If you’re paying a lot in taxes right now, it makes sense to defer some of them until later in life when your tax bracket lowers.

All this may be a moot point though depending on your total take home pay. If you earn more than $139,000 per year, you’re not allowed to use a Roth IRA.

So before you sign up for a retirement account, determine what your income cutoffs.

Whatever your investment plan, it’s never too late to get started. A Roth IRA is one of the most popular investment vehicles for saving for retirement.

Even if you’re late to saving, a Roth IRA still makes sense. As long as you’re still working and have income potential, put some away! Let compound interest work for the years you still have until retirement.