In recent years, the Roth IRA has skyrocketed in popularity with Americans looking to squirrel away money for retirement. In 2016, about one-third of the 42.6 million IRA (investment retirement account) owners held the Roth version; by mid-2018, over half of them did, according to the Investment Company Institute (ICI), with Roth assets totaling roughly $810 billion.

The Tax Cut and Jobs Act (TCJA), passed in late 2018, has also been a boost for Roths: The income tax rates lowered by the Act are set to revert to higher levels in 2026. Since they require you to pay taxes on contributions—but none on distributions—Roth IRAs work well for those expecting to be in a higher tax bracket in the future and/or when they retire. So the legislation fits right into the Roth's fundamental advantage.

Roth IRAs offer retirees some unique advantages in terms of taxes, distributions, and passing on unspent savings to the next generation. Keep reading to learn how a Roth IRA works after retirement.

Key Takeaways

  • You can keep contributing to Roth IRAs after retirement, as long as you have some earned income.
  • Once you turn 59½, you can start taking tax-free withdrawals of both contributions and earnings from your Roth IRA.
  • You are never required to take distributions from a Roth IRA.
  • Those who inherit your Roth IRA must take distributions from it, but are not taxed on the withdrawals.

A Roth IRA Refresher

Let's start with a few Roth IRA basics.

Although the Roth IRA shares many similarities with the traditional IRA, there are a few key differences between these two retirement accounts. Unlike a traditional IRA, your contributions to a Roth IRA are not tax-deductible. However, once you start taking qualified distributions from a Roth IRA, you will not be taxed on the withdrawals. A Roth IRA accrues earnings on a tax-deferred basis; the earnings are tax-free if you meet certain requirements.

Unlike traditional IRAs, there is no age threshold or limit for making Roth IRA contributions. Finally, Roth IRAs do not have required minimum distributions (RMDs) during the account owner’s lifetime.

Roth IRA accounts are especially popular with young American workers. More than three in 10 Roth IRA investors are younger than 40, according to ICI. Nearly a quarter (24%) of Roth IRA contributions are made by investors between the ages of 25 and 34, as compared to only 7.5% of traditional IRA deposits.

Roth IRA Contributions

No matter how old you are, you can continue to contribute to your Roth IRA as long as you’re earning income—whether you receive a salary as a staff employee or 1099 income for contract work (unlike a traditional IRA, which does not allow contributions after you reach 70½ years old, even if you have earned income). This provision makes Roth IRAs ideal for semi-retirees, who keep working a few hours a week at the old firm, or retirees who keep their hand in, doing consulting or free-lance jobs.

The maximum contribution for 2019 is $6,000 (or $7,000 if you’re 50 or older by the end of the year due to a $1,000 catch-up contribution). Contributions must be made by the tax-filing deadline of the next year (including extensions). For example, you can make a contribution to your 2019 IRA through April 15, 2020, or later if you file for an extension.

Roth IRAs do have income limits that affect how much you can contribute. For single taxpayers, the Roth contribution phase-out rule begins at $64,000 and tops out at $74,000, up from $63,000/$73,000 in 2018. For married couples filing jointly in which the spouse making the IRA contribution is covered by a workplace retirement plan, the 2019 phase-out range is $103,000 to $123,000, up from $101,000 to $121,000 in 2018. For an IRA contributor not covered by a workplace retirement plan and married to a covered individual, the deduction is phased out if the couple’s income is between $193,000 and $203,000 in 2019, up from $189,000 and $199,000 in 2018.

The moment you stop earning compensation, you can no longer make contributions to a Roth IRA. However, it is possible for your spouse to establish and fund a Roth IRA on your behalf if you are no longer earning income and your spouse still is. Because Roth IRAs cannot be held as joint accounts, the spousal Roth IRA must be held separately from the Roth IRA of the person making the contributions. Note that, unlike a traditional IRA, in which contributions must end in the year you turn 70½, there is no limit to when you can contribute to a Roth as long as your compensation qualifies your contributions.

A 2017 Employee Benefit Research Institute report found that 10.4% of investors contributed to their Roths in every year of the study (2010-2014); only 2.1% contributed to traditional IRAs.

Tapping into a Roth IRA

You can withdraw contributions from your Roth IRA at any time and for any reason without the threat of taxes or penalties. However, you can't withdraw earnings from your Roth IRA until you’re at least 59½ and the account has been open for five years or longer. If you do tap into earnings before this time, you will likely have to pay taxes and penalty fees on the withdrawals. Happily, Roth IRA withdrawals typically are considered as coming from contributions first. They don't count as dipping into earnings until after you withdraw the amount equal to contributions.

Once you turn 59½, you can start taking tax-free withdrawals of both contributions and earnings from your Roth IRA (as long as it’s been five years since you established and started funding the account).

Yet if certain conditions are met, it is possible to take tax- and penalty-free withdrawals (aka qualified distributions) from your Roth IRA earnings before you turn 59½. For example, if you were to use the distributed assets to purchase, build or rebuild your first home for yourself or a qualified family member, it would be considered a qualified distribution. (This is limited to $10,000 per lifetime.) You may also take qualified distributions from your Roth for qualified higher-education expenses or if you become disabled. Lastly, in the event of your death, the amounts distributed to your designated Roth IRA beneficiary are not subject to taxes.

On the other hand, if you take a non-qualified distribution that does not meet these requirements, you’ll have to cough up income taxes and/or a 10% early-distribution penalty. The source of a non-qualified distribution determines the applicable tax treatment.

Roth IRAs and Inheritance

Because there are no required minimum distributions with a Roth IRA, you may choose to leave the account untouched as long as you live. Why would you do such a thing? So you can leave money behind for your heirs.

And because you’ve prepaid the taxes on the Roth IRA, your beneficiaries won’t be hit with a big tax bill when they receive income from the account. This allows you to leave a stream of tax-free income to your children, grandchildren, or other heirs that can be stretched out over their lifetime. While heirs are subject to required minimum distributions on inherited Roth IRAs, they won’t be taxed on withdrawals as long as they comply with RMD rules. Again, this differs from traditional IRAs, which also require RMDs for beneficiaries and mandate tax payments, too (albeit at an advantaged rate).

The Bottom Line

There’s no question that a Roth IRA offers some extremely valuable benefits after retirement. Not only can you take tax-free withdrawals from a Roth, but you also have maximum flexibility in when and how you much you withdraw. This means you can leave a nice tax-free bundle behind for your heirs, or stagger distributions depending on how much you are getting from other sources, such as Social Security, freelance income, or other investments.

Roth IRAs can be opened at most brokerages, but some provide better access and options than others. Those looking to IRAs as a retirement account possibility can check out Investopedia's list of the best brokers for IRAs and Roth IRAs.