Is Maxing Out an IRA Worth It When I'm Close to Retirement Age?

You'll often hear that it's important to contribute to an IRA steadily throughout your working years. That way, you can invest your money and give it time to grow.

But what if you're on the cusp of retirement? Should you still be pushing yourself to max out your IRA, or even contribute to it at all? The answer is, it depends.

When time isn't as much of a factor

The reason it's so important to fund an IRA from a young age is that you give your money time to grow for many years. The stock market, over the past 50 years, has averaged an annual 10% return, as measured by the performance of the S&P 500 index.

If you put $300 a month into an IRA starting at age 27 and continue that through age 67, after 40 years, you'll have a nest egg worth almost $1.6 million. And if you invest your money in S&P 500 stocks or ETFs, you could enjoy a 10% average yearly return, too (although past performance is no guarantee of future returns).

As such it's a good idea to try to max out your IRA contributions year after year. But when you're about to retire, the idea of maxing out may be less appealing. That's because you might be on the verge of taking withdrawals from your account. And between your older age and the fact that you're looking to tap your IRA soon, the money you put in right before retirement may not grow as much.

If you're not sure whether to max out your IRA when you're close to retirement, or even contribute at all, ask yourself these questions:

What does my balance look like? IRAs max out this year at $7,500 for savers age 50 and over ($6,500 if you're under 50). If you have well over $1 million in savings and want to use your $7,500 for something else, like a nice vacation, then you may decide to skip that contribution and spend the money on something you want to enjoy. If you've worked hard and saved all your life, there's nothing wrong with that. But if you're low on savings, then frankly, every extra dollar contributed to your IRA helps.

What will I do with the money? If the money you might put into your IRA can be used to enhance your life in another way (for example, funding a home improvement project), then you may decide not to contribute to your retirement plan. But if you don't have specific plans for that money, you might as well boost your savings.

What does my tax burden look like this year? If you're worried about owing the IRS money, maxing out an IRA is a great way to lower your tax bill. This assumes, though, that you contribute to a traditional IRA, not a Roth IRA.

Maxing out could still work to your benefit

If you're 67 years old and you max out your IRA contributions this year, you won't see as much growth on that money as contributions you made in your 20s and 30s. But an extra $7,500 in retirement savings could still buy you more flexibility later in life.

Even if that money doesn't grow so much, it could buy you extra leeway to cover things like home repairs, entertainment, and medical bills. So if you can afford to max out your IRA when you're on the cusp of retirement and you don't need the money for something specific, you might as well sock it away.