The prospect of loss becomes more salient in later life, and the opportunity to avoid loss is often used to motivate older adults. We examined the effect of loss incentive on working memory in young and older adults. Diffusion-modeling analyses, manipulation of task parameters, and self-report measures identified which aspects of cognitive-motivational processing were most affected within each group. As predicted, loss incentive increased working memory performance and self-reported motivation in young adults, but, consistent with prior work, had the opposite effect in older adults. Diffusion-modeling analyses suggested the primary effect was on the quality of the memory representation (drift rate). Incentive did not interact with retention interval or the number of items in the memory set. Instead, longer retention intervals led to better performance, potentially by improved differentiation between studied items and the unstudied probe as a function of temporal context. Overall, the results do not support theories suggesting that older adults are either more motivated by loss or that they ignore it. Instead, the loss incentive increased young adults' performance and subjective motivation, with opposite effects for older adults. The specific impact on drift rate and lack of interactions with set size or retention interval suggest that rather than affecting load-dependent or strategic processes, the effects occur at a relatively global level related to overall task engagement.