Under the new SECURE Act, if you have earned income, there is no age limit for contributing to a traditional IRA (previously, you had to stop doing so the year you were 70 and a half years old). This change places traditional IRAs on a par with Roth IRAs, which never had an age limit. There's no age limit for opening a Roth IRA, but there are income and contribution limits that investors should be aware of before funding one. Let's look at the pros and cons.
Although earned income is required to make an IRA contribution, income limits apply to IRA contributions regardless of age. The contribution limits for traditional IRA contributions that you can deduct on your tax return are the strictest; Roth IRA contributions are allowed with a higher income limit. Anyone can make a traditional non-deductible contribution to the IRA, regardless of income or age. Those contributions could then be converted to Roth for a “clandestine” Roth IRA.
However, such a maneuver will entail tax costs in the (probable) scenario where a retiree has significant traditional IRA assets that have not yet been taxed. The RMD directive ensures that you pay taxes on your savings after enjoying years of tax-deferred growth. As you might have guessed, Roth IRAs are the only accounts that don't require minimum distributions at any age. Since these accounts are funded with after-tax money, Uncle Sam won't benefit from your withdrawals.
This, of course, assumes that you comply with the “qualified retirement rules” established by the IRS. In addition, traditional IRA investments benefit even less from that tax-protected capitalization than contributions to Roth IRAs, since traditional IRAs are subject to RMDs that are ultimately subject to taxation. However, while Roth IRAs or corporate retirement plans tend to be better receptacles for additional contributions from older workers, a traditional IRA may be appropriate in a handful of situations. Traditional IRA contributions later in life can also make sense if the person earns too much to contribute directly to a Roth IRA; in that case, the taxpayer can take advantage of the clandestine Roth IRA maneuver, fund the traditional IRA, and then convert it to Roth.
However, despite the fact that the Security Act raises the age limit for traditional IRA contributions, IRA contributions continue to have restrictions. Even people with high incomes who can't directly fund a Roth IRA can use this strategy, also known as a clandestine Roth IRA. As noted above, the IRS doesn't allow contributions to a traditional IRA after age 70 and a half, so a Roth is your only IRA option after that age. A Roth IRA might be better than a traditional IRA for people who want to save on taxes in retirement when they expect to earn more later than they do now.
Just as you can only contribute to your IRA until you reach a certain age, most IRAs impose the required minimum distributions (RMDs) once you turn 70.5 or 72, depending on your date of birth. The distribution rules of a Roth IRA can also help you if you intend to leave your IRA to your heirs. Jeffrey Levine, an expert in tax and financial planning, described traditional IRA contributions after the RMD era as something like a revolving door of IRA money.