Are some Americans just too old to bother with Roth IRAs?
Ross entered the retirement savings world in 1998, a time when most baby boomers and many of Gen Xers were starting their careers and getting their financial footing.
By design, Roths favor savers who contribute early and withdraw late: You pay tax up front when you put money into a Roth account, and any interest you earn on the investment thereafter grows tax-free, provided you follow the rules.
So it’s perhaps not surprising that so few older Americans have Roth IRA accounts: The share of Vanguard clients with Roth IRAs in 2023 declines with age, from 21% of 25-34 year-olds to 9% of those 65 and older.
“Roth plans were invented when they were in the prime of their working lives,” says Christopher Lyman, a certified financial planner in Newtown, Pa., of baby boomers. “They had everything on autopilot, and life happens.”
Retirees and older workers are less likely to have Roth IRAs
Experts cite several reasons for low participation rates in Roth IRAs among older Americans.
First, many older workers began entering the workforce at a time when Roth didn’t exist.
Second, many later-life Americans are earning the highest amount of money they’ll ever earn in their lifetimes, and peak earning years are generally not the best time to open a Roth account because of the tax burden.
Third, Roths are a powerful tool for young savers, and young savers know it: Contributing to a Roth early in your career can earn you tax-free interest for decades to come.
“That’s why this is great for young people,” says Laura Mattia, a certified financial planner in Sarasota, Florida.
Matia says that early in your career, you’re probably making less and in a lower tax bracket. At that age and in that bracket, contributing to a Roth IRA and paying the tax up front will reduce your tax burden.
In fact, many advisors consider Roth plans to be a good deal for someone making the typical full-time American salary of about $59,000 a year.
“Are you in the 22% or lower tax bracket?” Lyman said, referring to the tax rate for individuals earning five figures in 2024. “In that case, we would recommend a Roth plan.”
What is the difference between a traditional IRA and a Roth?
In a sense, traditional IRAs and Roth IRAs work in reverse: You contribute pre-tax money to a traditional IRA or 401(k) and essentially live off a fixed income and defer paying taxes until retirement, when you’ll likely be paying a lower tax rate than you did during your working years.
With a Roth, you pay the tax up front, and any interest you earn thereafter is generally tax-free.
Here’s a vivid example of how Roth accounts can benefit you: PayPal founder Peter Thiel is the famous (or infamous) figure who used Roth IRAs to grow his four-figure retirement fund to $5 billion without paying taxes on the earnings.
Thiel opened the account in his early 30s, but experts say Roth IRAs aren’t just for young people.
“There are definitely reasons to do it if you’re in your 60s or even beyond,” Mattia said.
Here’s one example: Your peak earning years won’t last forever. As you approach retirement, your income and tax rate will likely decline. Eventually, you’ll reach a point where the tax burden on your Roth contributions will be relatively insignificant.
“Let’s say you retire, you may find yourself in a lower tax bracket again, just like you were earlier in your career,” says Sabino Vargas, senior financial advisor at Vanguard.
Ross’s transformation: confusing but compelling
As Americans prepare for retirement, many are considering Roth conversions.
With a Roth IRA conversion, “you take the money out of a traditional IRA, pay the taxes, and convert it into a Roth IRA,” Mattia said, where the funds can continue to accumulate interest tax-free.
Roth conversions can diversify retirement savings for older investors who were unable to open a Roth account.
The math is complicated, but by working with a financial planner, older investors can use Roth conversions to reduce their taxable income in retirement and lower their future tax rates.
Once retirees reach age 73, they typically must begin making annual withdrawals from their tax-advantaged retirement accounts so the government can begin collecting taxes on them.
For wealthy investors with large retirement accounts, these mandatory distributions can generate large tax bills in retirement. By rolling your funds into a Roth account up front, you can reduce your tax burden by lowering the taxable portion of your savings.
“I just did one for a 62-year-old woman,” says Michelle Crum, a certified financial planner in Ann Arbor, Mich. “She plans to convert $70,000 into a Roth plan each year for the next 10 years. If she lives to age 90, she’ll save more than $800,000 in taxes.”
Vargas said Roth conversions are such an important tool that Vanguard counts them as one of the three key retirement decisions in a tax-efficient retirement strategy.
(Other decisions involve when to start taking Social Security benefits and coordinating how you withdraw money from different types of retirement accounts.)
To convert to a Roth IRA or not?This is a key retirement question facing Gen Xers.
Inheriting a Roth IRA is Great for Heirs
If you plan to pass on some of your Roth retirement savings to your heirs, they could enjoy tax benefits, experts say.
If your child inherits money from a traditional IRA, you typically pay tax when you withdraw the funds. If your child inherits funds in a Roth IRA and follows the rules, the tax has already been paid.
“There are no taxes, so you don’t have to worry about calculating taxes,” Mattia says.
Ultimately, financial advisors say Roth IRAs are a good way to diversify your retirement accounts by combining taxable and tax-free savings.
“Overall, the flexibility and tax advantages of a Roth IRA make it a valuable component of a comprehensive retirement strategy,” says Spencer List, a certified financial planner in Dallas, “even for those who start investing later in life.”
