Are some Americans too old to bother with a Roth IRA? 

The Roth entered the retirement savings world in 1998, a moment when most boomers and many Gen Xers were launched in their careers and set in their financial ways.  

By design, the Roth favors the saver who contributes early and withdraws late. You pay the taxes up front when you put money in a Roth account. If you follow the rules, all the interest you subsequently earn on the investment is tax-free.  

Perhaps it is no surprise, then, that few older Americans have Roth accounts. The share of Vanguard clients with Roth IRAs in 2023 dwindles by age, from 21% at ages 25-34 to 9% at age 65 and older. 

The Roth “got invented in the middle of their working career,” said Christopher Lyman, a certified financial planner in Newtown, Pennsylvania, speaking of boomers. “They had everything set on autopilot, and life happens.” 

Retirees and older workers are less likely to have Roth IRAs

Experts cite several good reasons why Roth IRA participation is lower among older Americans.  

First, many older workers entered the workforce at a time when the Roth did not exist.  

Second, many late-career Americans are earning the most money they will ever earn. Your peak earning years are not generally the best time to start a Roth account, because of the tax bite. 

Third, the Roth is a powerful tool for young savers, and young savers know that. Roth contributions at the start of your career can reap tax-free interest for decades. 

“That’s why it’s so great for the young kids,” said Laura Mattia, a certified financial planner in Sarasota, Florida.  

Early in your career, you are probably earning less and paying taxes at a lower rate, Mattia said. At that age, and in that tax bracket, you will take a smaller tax hit by contributing to a Roth IRA and paying the taxes up front. 

In fact, many advisers consider the Roth a good deal for anyone earning a typical full-time American salary, which is about $59,000 a year.  

“Are you in the 22%-or-less bracket?” Lyman said, referring to the tax rate for individuals earning five-figure incomes in 2024. “Then, we would recommend doing Roth.” 

What's the difference between a traditional IRA and a Roth?

In a sense, traditional and Roth IRAs operate in reverse. You contribute pre-tax dollars to a traditional IRA or 401(k). In effect, you are postponing the taxes until retirement, a time when you are likely to be living on a fixed income and paying a lower tax rate than in your working years.  

With a Roth, you pay the taxes upfront. After that, the interest is generally tax-free. 

Here’s a vivid example of how a Roth account can pay off: Peter Thiel, a founder of PayPal, famously (or infamously) leveraged a Roth IRA to grow a four-figure retirement fund into $5 billion, without paying taxes on the earnings.  

Thiel started that account in his early 30s. But Roth IRAs are not only for the young, experts say. 

“There are definitely reasons to do it in your 60s, and even later,” Mattia said. 

Here’s one: Your peak earning years will not last forever. As you approach retirement, you will probably dial down your income, and your tax rate. Eventually, you will reach a point where Roth contributions have comparatively mild tax consequences. 

“Let’s say you retire. Now, it’s possible that you find yourself again in a lower tax bracket,” much like at the start of your career, said Sabino Vargas, a senior financial adviser at Vanguard. 

The Roth conversion: Confusing but compelling

As Americans ease into retirement, many consider a Roth conversion.  

In a Roth conversion, “you’re taking money out of a conventional IRA, you’re paying taxes on it, and you’re converting it into a Roth,” Mattia said. There, the money can continue to amass interest, tax-free. 

A Roth conversion can diversify the retirement savings of an older investor who hadn’t gotten around to opening a Roth account.  

The math is complicated. Yet, working with a financial planner, older investors can use a Roth conversion to pare down taxable income in retirement, potentially lowering their future tax rate. 

Retirees generally must start making annual withdrawals from tax-favored retirement accounts at age 73, so the government can begin collecting its taxes.  

For a wealthy investor with a large retirement fund, those required distributions can generate a lot of taxes in retirement. Moving money into a Roth account beforehand can ease the tax burden, because it reduces the taxable portion of your savings. 

“I just ran one plan for a 62-year-old woman,” said Michelle Crumm, a certified financial planner in Ann Arbor, Michigan. “She is going to start converting $70,000 per year in a Roth for the next 10 years. If she lives to age 90, she will save over $800,000 in taxes.” 

The Roth conversion is such an important tool, Vargas said, that Vanguard counts it among three key retirement decisions in its Tax-Efficient Retirement Strategy.  

(The other decisions concern when to begin collecting Social Security, and how to coordinate withdrawing money from different types of retirement accounts.) 

Convert to a Roth IRA or not?It's an important retirement question facing Gen X.

A Roth IRA inheritance is great for your heirs

If you plan to pass on some of your Roth retirement savings to your heirs, experts say, the heirs will reap the tax benefits. 

If your children inherit money from a traditional IRA, they generally pay taxes when they withdraw the funds. If they inherit Roth IRA dollars and follow the rules, the taxes are already paid. 

“They don’t have to worry about figuring out taxes,” Mattia said, “because there are no taxes.” 

In the final analysis, financial advisers say, a Roth IRA is a good way to diversify your retirement account, giving you a mix of taxable and tax-free savings. 

“Overall, the flexibility and tax advantages of a Roth IRA make it a valuable component of a well-rounded retirement strategy,” said  Spenser Liszt, a certified financial planner in Dallas. “Even for those who start investing later in life.”