In the world of retirement investing, it is always better to start earlier. Doing so allows you to take advantage of compounding returns, which is a fancy way of saying that the earlier you start, the more your tree can grow. But in the world of Self-Directed IRA investing, you might hear this aphorism: “The best time to plant a tree was twenty years ago. The next best time is right now.” For some people who are still working, there is no choice but to start from where they are. And in that case, there may be unique catch-up rules to help investors along. But what are those rules, and what do they have to do with you? Let us explore just a few of them so you have a better idea of what investing in Self-Directed IRAs later in life might look like.
What if You Have a Self-Directed Roth or Traditional IRA?
Recently, a question posed to MarketWatch highlighted one reader who is 73 years old and still considering contributing to a Roth IRA. Says MarketWatch: “Working seniors, regardless of their age, have always been able to contribute to a Roth IRA if their income was within certain limits but if over age 70½, they could not contribute to a Traditional IRA. The SECURE Act of 2019 eliminated that age restriction so now persons over age 70½ can contribute to a Traditional IRA if they have earned income.” In other words, the field has expanded a bit. People have more options for investing, even if they are over the traditional age of retirement.
In a Traditional IRA, MarketWatch notes, older investors (50 years old and older) can put more money into a Traditional IRA than can their younger counterparts. For the year 2020, the contribution limits were $7,000 as a maximum. This can also include up to 100% of income, which is important for retirement investors who are now working part-time and want to save money in the short-term by using tax-deductible contributions toward a Traditional IRA. However, we should note that this does require earned income. Make sure you consult with a tax advisor before you do anything else.
What About Investing Later in Life?
“Catch-up contributions” are not always a huge amount of money. For example, a catch-up contribution in an IRA only represents about one thousand dollars, depending on when and which account is being discussed. But it is important to note that there are some potential advantages to investing later in life.
For starters, wisdom. Investors with Self-Directed IRAs may have added experience in a field like real estate, for example. Having that added experience can make the investor more confident that they know how to spot opportunities that give them an advantage over the general population—but not an unfair or illegal advantage. It is simply an advantage that is won with information learned over time.
Second, many investors who get started later in life also have plenty of additional income due to the course of their career over time. Those changes in career status can give them more disposable income. For many investors, that means putting more money aside in a high-contribution limit account such as a 401(k) or a Self-Directed Solo 401(k).
Investors need to know that just because you are near retirement age does not always mean that you are at the end of your retirement investing journey. There may be many advantages you can use with the existing laws and accounts.