A question I hear from clients fairly often is, "When can I start taking money out of my Roth IRA?" It's a fair question. You spend decades saving, and at some point the whole idea is to enjoy what you've built.
The rules themselves are fairly simple. You can generally withdraw what you've contributed at any time, and once you're 59½ and have met the five-year requirement, the earnings come out tax-free as well. But the rules only tell you what you're allowed to do. They don't tell you what makes sense.
I think there's a more useful question to ask, and it's one I come back to with clients often.
Just because you can take money out of your Roth IRA, should you?
And maybe more importantly, what do you want that money to do for you in your retirement?
Most of us spend our working years focused on one thing: building enough to retire comfortably. But once retirement starts, the question changes. It's no longer just how much you have. It's where that money sits and how you pull it out.
Picture someone who retires with a traditional IRA, a Roth IRA, and a regular taxable account. All three can help pay for retirement, but each is taxed differently. Having money in different types of accounts gives you choices. We call this tax diversification. Just as we spread investments around so we aren't leaning too hard on one company or asset class, we can spread out the tax treatment of our savings, too. That flexibility can be valuable.
After more than two decades of working with retirees, I've noticed that many people end up with more than they'll ever spend. Between Social Security, maybe a pension, and required distributions from traditional IRAs, their lifestyle is often covered before the Roth is ever touched. So what happens to the Roth?
Often, nothing.
And that isn't necessarily a bad thing. Unlike traditional IRAs, Roth IRAs don't require distributions during the original owner's lifetime, so the money can stay invested and potentially keep growing tax-free for years, even decades. For someone who doesn't need it, that's one of the biggest advantages a Roth has.
Eventually, that money may pass to children or other beneficiaries, and this is where account types can matter. Most non-spouse beneficiaries have to empty an inherited account within ten years. Someone in their 40s or 50s who inherits a large traditional IRA may have to take those distributions on top of an already healthy income, which could push them into even higher tax brackets. Qualified distributions from an inherited Roth IRA’s are generally tax-free.
Of course, that doesn't mean everyone should hold on to their Roth just for the kids. Retirement savings should first serve the person who earned them. But when you have more than enough, letting a Roth keep growing can make a lot of sense.
Now the flip side. Say you're retired and need an extra $40,000 for a home renovation, a new car, or a family trip you've been looking forward to. (This is just an example, and everyone's numbers are different.) Pulling it all from a traditional IRA could push part of your income into a higher tax bracket and may even raise your Medicare premiums down the road.
This is where a Roth IRA can earn its keep. Qualified Roth withdrawals generally don't add to your taxable income, so taking some or all of that money from the Roth may help you avoid those side effects. Sometimes, though, paying a bit more tax now is the better move than leaving a big traditional IRA that could create even larger tax bills later. The important thing is that you have options, and options are especially valuable in retirement.
There's one more reason I'm thoughtful about when clients tap their Roth IRAs: time. The longer money stays invested in a Roth, the longer it can compound without future taxes on qualified withdrawals. That matters most for someone who may not need the money for another 15, 20, or even 30 years. And once it's out, you can't easily put it back.
I don't think the goal of retirement planning should be to build the biggest Roth IRA possible. And I don't think everyone should save theirs for the kids. The goal is to make the most of the money you've worked so hard to build.
For some retirees, that means using Roth withdrawals to help manage taxes and Medicare premiums while they enjoy retirement. For others, it means leaving the Roth alone for decades and eventually passing a tax-advantaged asset to the next generation. And for many, the right answer is somewhere in between.
A Roth IRA is more than an account that lets you take money out tax-free. It's a tool that can give you more control over your retirement income, your taxes, and potentially what you leave behind.
The question isn't simply when you're allowed to take money out. It's when taking money out actually makes your financial life better.
And those are two very different questions.
This article is for educational purposes only and isn't tax or investment advice. Tax rules depend on your individual circumstances, so talk with your financial advisor or tax professional before making decisions.