If you've read anything about retirement planning, chances are you've heard about Individual Retirement Accounts (IRAs). Opening a traditional IRA is one of the most popular ways to save for retirement because you can delay paying taxes on your investment earnings as long as you keep the money in the account.
Many people realize these accounts can be helpful at some point in their lives — but you might not be sure when opening an IRA makes sense. These accounts can potentially be useful at nearly every life stage, and there really is no "right" age to open one up.
Before Working Full-Time (22 & Younger)
There's no minimum age for opening an IRA. Students can open one for themselves, and parents can open an account on behalf of their young children. Getting such an early start can help make hitting retirement goals easier later on.
However, younger people also need to remember you can only fund an IRA with earned income — money you get from work — and you can only add up to a maximum of $6,000 a year (for 2019 and 2020). Earned income could come from a summer job, babysitting, mowing lawns and so on. It can't come from a gift, an allowance or a similar source of income. So if your 12-year-old son will earn $1,000 from his paper route in 2020, he can add up to $1,000 for the year to an IRA.
Early Career (22 to 35)
At the start of your career, you know saving for retirement is important, but you likely have plenty of other financial goals lined up — paying off student loans, saving for a house down payment and getting out of credit card debt to name a few.
These might take up most of your budget, and that's fine. But you don't need a fortune to open an IRA. There's no minimum contribution required to open most IRAs. After that, you can add more on your schedule. For example, Susan opens her IRA with the account minimum. She adds $50 per month for six months but can no longer afford to continue after buying a new car. She can stop contributing and pick up saving again later when she has the money for it.
The earlier you start investing, the easier it generally is to reach your retirement goals, because every dollar you save at the start of your career has more opportunity to grow. Opening an IRA now and contributing even a small amount can help.
Prime Working Years (35 to 60)
This is when people typically start thinking about opening an IRA and with good reason. You're in your prime earning years, so you likely have the money to tackle this goal. At this stage of your life, it's generally a good idea to start saving as much as possible for retirement.
One goal is not only to open an IRA, but also to contribute the maximum amount possible each year. As of 2020, you can contribute a maximum of $6,000 a year when you're younger than 50 and up to $7,000 a year if you're 50 or older, according to the IRS.
If you do choose to max out every year, remember that if you fall short you can't make up contributions later. For example, 40-year-old Brian was not able to save anything in 2018. He got a big pay raise in 2019 and wants to make up lost ground. Unfortunately, the most he can save is still $6,000 for 2019 because of the IRA contribution limits.
Approaching Retirement (60 & Up)
The IRA retirement age is 59½. This is when you can start making retirement withdrawals from the account without a tax penalty. But people are living longer and working later in life, which means you may want to keep saving past age 60.
To open and add money to an IRA during retirement, first you must have earned income from some type of work. Social Security payments, investment income and pension income don't count.
As a result of changes put in place through the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), beginning in the 2020 tax year, you now can contribute to your traditional IRA in the year you reach age 70½ and beyond, as long as you have earned income. The previous maximum age limit for traditional IRA contributions has been eliminated, starting in 2020. Keep in mind, though, for 2019, if you’re age 70½ or older, you can’t make a regular contribution to a traditional IRA. You always have the option to contribute to a Roth IRA, which doesn't have a maximum age limit.
At this stage, adding money to a Roth IRA not only saves for your future but is also an way to leave an inheritance for others. Your investments will grow tax-free in a Roth IRA, and when your family inherits it, the earnings will still be tax-free. If you ever need money for yourself, you can make withdrawals from your Roth IRA whenever you want (though you may still be taxed if you haven't funded the Roth IRA for at least five years or are under 59½).
In the end, there is no "right" age for when to open an IRA. Whether you're nine or 90, the IRA decision comes down to how well it matches up with your current financial goals.
Learn more about opening an Individual Retirement Account.