When Should You Stop Contributing to a Roth IRA?

Learn when should you stop contributing funds into your Roth Individual Retirement Account (IRA). Find out how much money can minors contribute and how long should funds stay in your account.

When Should You Stop Contributing to a Roth IRA?

If you qualify, qualified distributions from a Roth IRA are tax-free. You can make contributions to your Roth IRA after you turn 70 ½, and you can leave amounts in your Roth IRA as long as you live. The account or annuity must be designated as a Roth IRA when established. Younger people don't have to worry about the five-year rule. But if you open your first Roth IRA account at age 63, try to wait until you're 68 or older to withdraw any winnings.

You don't need to contribute to the account in each of those five years to pass the five-year test; the account itself only needs to be five years old. The sooner you start a Roth IRA account, the better. There is no age limit to contribute funds, but there is an age limit to start withdrawing funds. You must be 59 and a half years old to start withdrawing income from contributions or must pay taxes and penalties. In addition, to avoid taxes, the funds must be in the account for five years. Children of any age can contribute to a Roth IRA, as long as they have earned income.

An IRA contribution is not the same as an IRA transfer or an IRA rollover. When you move money from a business-sponsored retirement plan, such as 401 (k) or 403 (b), directly into an IRA, it's called a transfer. You can do it at any age. When you transfer money from one IRA to another IRA, it's called an IRA transfer, and you can also do it at any age. Conversely, a contribution is new money that was not previously in a tax-deferred account and is now entering an IRA.

You can open an IRA at any age, but you need to earn income to contribute to it. A 16-year-old with a part-time job can open an IRA and start contributing, but a full-time 20-year-old student with no income cannot make any contributions to the IRA. Keep in mind that minors can only open IRAs with custody, so they will need the help of an adult to use an IRA until they reach the minimum legal age to invest (usually 18 years old, but depends on state law). If your children leave their money in the Roth IRA until retirement, they could be considering 50 years or more of investment growth, completely tax-free. If you are still working, you cannot convert your employer-provided 401 (k) to a Roth IRA, but you may be able to convert within the plan to a Roth 401 (k) if your employer allows it. Those two rules make the Roth IRA a good middle ground between children who want easy access to their cash and parents who want to make sure some of that money is saved for the future. Contributions to the Roth IRA are allowed without an age limit, as long as an older person has income from employment and does not exceed the income limit.

In addition, participating in a qualifying retirement plan does not affect your eligibility to make contributions to the Roth IRA. Another important tax consideration is that Roth IRAs are not subject to the minimum distribution rules required for the life of the participant, so the entire account can be kept until needed later in retirement or, if not, it is a tax-efficient vehicle for leaving heirs since distributions are tax-free. A simple way to see this is that through the Roth IRA, the older worker has the opportunity to relocate savings that have been in a taxable environment into one where earnings are tax-free. If you are unable to leave earnings of your contributions in a Roth IRA for a sufficient period of time for five years, you will incur early withdrawal penalties. If your income is relatively low, a traditional or 401 (k) IRA may allow you to get more contributions as saver tax credit than you will save with a Roth. When you make your first Roth IRA contribution and five tax years have elapsed, any earnings you withdraw will pass the five-year test. While not tax-deductible, contributions to a Roth IRA give you the opportunity to create a tax-free savings account. The incentive for contributing to a Roth IRA is generating savings for the future rather than getting a current tax deduction.

Whether you're nearing retirement, still working toward retirement or have already retired, investing in a Roth IRA can benefit you. You can open Roth IRA accounts at any age - whether you're 22 starting your career or 70 expecting retirement in a couple of years - and if you're over 59 and a half years old, you can freely withdraw money contributed from your Roth IRA account without facing fines.