In recent years, the Roth IRA has skyrocketed in popularity with Americans looking to stash money away for retirement. In 2016, about a third of the 42.6 million Individual Retirement Account (IRA) owners in the U.S. held the Roth version; by 2019, more than half of them did, according to Investment Company Institute (ICI) data.
The Tax Cut and Jobs Act (TCJA), passed in late 2017, also provided a boost for Roths: The income tax rates that the Act lowered are set to revert to higher levels in 2026. Since Roth IRAs require you to pay taxes on contributions—but none on distributions—they work well for people expecting to be in a higher tax bracket in the future and/or when they retire. So the new law fits right into the Roth's fundamental advantage.
Roth IRAs offer retirees some other 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.
- You can keep contributing to a Roth IRA 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 if you've had the account for at least five years.
- Unlike a traditional IRA, you are never required to take distributions from a Roth IRA and can leave the entire account to your heirs.
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 Unlike a traditional IRA, your contributions to a Roth IRA are not tax-deductible and can be withdrawn at any time. Once you start taking qualified distributions from a Roth IRA, you will not be taxed on the earnings your contributions made over the years. A Roth IRA accrues earnings on a tax-deferred basis and those earnings will be tax-free if you meet certain requirements.
Also unlike traditional IRAs, there is no age limit for making Roth IRA contributions, just as long as you have earned income. Finally, Roth IRAs do not have required minimum distributions (RMDs) during your lifetime.
Roth IRA accounts are especially popular with young American workers. More than three in 10 Roth IRA investors are under 40, according to the 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.
Making Roth IRA Contributions
As mentioned, 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 days a week at the old firm, or retirees who keep their hand in, doing occasional consulting or freelance jobs.
The maximum Roth 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 following 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 also have income limits that affect whether (and how much) you can contribute. Married couples filing jointly, for example, must have a modified adjusted gross income (MAGI) under $122,000 to be eligible to make a full contribution; between $122,000 and $137,000 they can make a partial contribution.
Although you can no longer contribute to a Roth IRA once you stop earning compensation, your spouse, if you have one, can establish and fund a Roth IRA on your behalf if they still have earned income. Because IRAs cannot be held as joint accounts, the spousal Roth IRA must be in your name even if your spouse is making the contributions.
If your spouse has earned income and you don't, they can fund your Roth IRA for you.
Taking Roth IRA Distributions
You can withdraw contributions from your Roth IRA at any time—and for any reason—without taxes or penalties. However, you can't withdraw the earnings in 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 penalties on the withdrawals. (Happily, Roth IRA withdrawals typically are considered as coming from contributions first. So you won't be taking out earnings until you've withdrawn an amount equal to your total contributions.)
There are, however, some exceptions to the taxes and penalties. In certain cases, you're allowed to take tax- and penalty-free withdrawals (a.k.a. qualified distributions) from your Roth IRA earnings before you turn 59½.
For example, if you were to use the money to buy, build, or rebuild a 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.
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.
Leaving a Roth IRA Inheritance
Because there are no required minimum distributions with a Roth IRA during your lifetime, if you don't need the money for living expenses, you can leave it all to your heirs.
Because you’ve prepaid the taxes on the Roth IRA, your beneficiaries won’t be hit with a 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 non-spouse heirs must take required minimum distributions on inherited Roth IRAs, they won’t be taxed on withdrawals as long as they comply with the RMD rules. Again, this differs from traditional IRAs, where RMDs are taxable for beneficiaries, just as they are for the original owners.
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 income you are getting from other sources, such as Social Security, work, or other investments.
Roth IRAs can be opened at most brokerages, but some provide better access and options than others. If you're shopping around, check out Investopedia's list of the best brokers for IRAs and for Roth IRAs.