Can I benefit from putting money in an IRA in my 60s?

Q: I am 68 years old and still working. I have $50,000 in cash savings. Should I put the $50,000 and any additional income I can into an IRA to shelter it from tax?

A: Unfortunately, there is only a limited extent to which you can use an IRA to shelter money from tax at this point due to IRA contribution rules in general, and other limitations specific to Roth IRAs.

IRA contribution rules

You might get a limited amount of benefit from an IRA, most likely a Roth IRA rather than a traditional IRA.

There are two specific details that indicate a Roth IRA might be the better fit:

Tax advantages

One is that if your $50,000 is in an ordinary savings account, chances are you have already paid tax on it, since savings accounts do not have any tax-advantaged properties. Roth IRAs are designed to be funded with after-tax dollars, while traditional IRAs are designed to be funded with pre-tax dollars. It is possible you could use any contributions to a traditional IRA to get a tax deduction from any future taxable earnings.

Maximum age for contributions

The other detail that indicates a Roth IRA might be a better fit is that the maximum age at which you can make contributions to a traditional IRA is the tax year prior to the one in which you will reach age 70 1/2. Given your age and the fact that the amount you can contribute to an IRA in any one year is limited, you would not have time to get the bulk of your savings into a traditional IRA even if you could benefit from the tax deduction. The maximum annual contributions to both Roth and traditional IRAs in any one year is $5,500, plus a $1,000 catch-up contribution if you are age 50 or older. So, in your case, the maximum would be $6,500 per year.

Since you can continue contributing to a Roth IRA after age 70 1/2, you could eventually get all of your savings into a Roth even with the annual contribution limit. However, before doing so, you should be aware of some limitations of Roth IRAs.

Limitations of Roth IRAs

Early withdrawal penalties

Any money you put into a Roth has to stay in the plan for five years, or else it may be subject to a 10 percent tax penalty. So, before you put money into a Roth, think about when you will need to draw it out.

Another limitation of Roth IRAs is that the tax benefit only applies to investment earnings. Given that someone as close to retirement as you are is likely to invest fairly conservatively, this suggests that those investment earnings and thus the tax benefit may be fairly small.

In short, the tax benefits of a Roth IRA may be worth pursuing, but they are likely to be of limited benefit at this point. You should also be considering additional elements of your retirement plan, such as how long you can continue to work and how much you are eligible for in Social Security benefits.

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