There has been a rapid increase in studies on the effects of incentive on cognition, but still a great deal we don’t know. What aspects of cognitive processing are most affected by incentives? How do task parameters and individual or group differences influence whether incentives will be effective? The present study takes some steps towards answering those questions: We used diffusion modeling to identify which aspects of cognitive processing were affected by loss incentive in a working memory task with varying retention intervals in young and older adults. Our results confirm some previous findings suggesting opposite responses to loss by young and older adults, help identify which aspects of processing are most affected in each group, and reveal some surprising beneficial effects of longer retention intervals. The analysis reveals the value of assessing the effects of incentive and task structure on theoretically meaningful processing parameters in addition to the behavioral performance itself.