When thinking about their retirement plans, most people want to know, “What happens after retirement? How much money will I have? How will taxes impact me? Will my money last as long as I do?” The Roth individual retirement account, known colloquially as a Roth IRA, has gained in popularity because it adds a few twists to the answers to those questions, especially when compared to a Traditional IRA.
Six Key Differences
Here are six ways a Roth IRA differs from a Traditional IRA—and from most other qualified plans—after retirement.
- If you retire before the age of 59½, you can withdraw Roth IRA contributions penalty and tax free.
- All qualified Roth IRA distributions, including both contributions and earnings, are tax free after the age of 59½.
- Qualified Roth IRA distributions have no effect on Social Security tax status.
- There are no required minimum distributions (RMDs) with a Roth IRA.
- You can continue to contribute to your Roth IRA after the age of 70½.
- Your Roth IRA can go to your heirs tax free.
Here’s a further breakdown of each of these key differences.
Retire Before 59½
You can withdraw contributions from your Roth IRA before 59½ with no penalties or taxes. This means your Roth IRA can provide additional income for you if you are planning to retire early.
Earnings cannot be withdrawn until you are at least 59½ and the account has been open for five or more years, unless you qualify for an exception. Exceptions include purchasing or building your first home, higher-education expenses, disability and some others.
The main advantage of a Roth IRA after retirement is that all distributions of both contributions and earnings are tax free. No matter what your tax bracket in retirement, you will not pay taxes on money that comes out of your Roth IRA. While a Traditional IRA does offer tax deferral, many experts consider that a temporary benefit, as you will eventually pay taxes on both contributions and earnings at retirement.
No Impact on Social Security
Distributions from either type of IRA will not cause you to lose Social Security benefits taken before your full retirement age of 65, 66 or 67 (depending on when you were born), but taxes are a different matter altogether. Distributions from a Traditional IRA are considered taxable income. Not so with distributions from a Roth IRA. You can take out as much as you want from a Roth and it will have no impact on the tax status of your Social Security benefits.
You must begin taking RMDs from your Traditional IRA (and being taxed on them) at the age of 70½, whether you need the money or not. Roth IRAs have no such rule. You can leave your Roth IRA untouched for your lifetime. This gives you great flexibility when it comes to letting your investments grow if you don’t need the money until later in life.
Contributions After 70½
If you are employed (being self-employed counts) in retirement, you can continue contributing to your Roth IRA as long as you are earning income. Contributions to a Traditional IRA must stop at the age of 70½.
If you stop working, your spouse (if he or she has earned income) can establish and fund a spousal Roth IRA in your name at any age. The ability to contribute to a Roth IRA savings-and-investment plan after retirement could be important if you discover, for example, that healthcare costs are more than you expected.
Heirs Inherit Tax Free
As you are not required to draw down your Roth IRA when you are 70½, you can leave those funds to your heirs in the form of a tax-free estate. Typically, a Roth IRA passes tax free to heirs as long as the account doesn’t go through probate. Probate isn’t necessary if your beneficiaries are named as such in your Roth IRA. Your heirs will be subject to RMDs on inherited Roth IRAs, but there will be no taxes assessed.
Retirement Is Only the Beginning
The benefits of a Roth IRA don’t stop at retirement. In fact, a case could be made that the real benefits of a Roth IRA begin when you leave the workforce. Tax-free income, no RMDs and the ability to leave a tax-free inheritance are only part of the picture. You should, of course, talk with a trusted financial advisor or tax professional before deciding on a retirement savings plan.