Use Roth IRA Last When Withdrawing Money In Retirement
Eileen St. Pierre, The Everyday Financial Planner
As more and more Baby Boomers enter retirement, the focus will shift from saving for retirement to how to withdraw money in retirement. Regardless of your financial situation, funds in your Roth IRA should be used last.
There is no age when you have to start making withdrawals.
For your tax-deferred retirement accounts like 401(k)s, 403(b)s and Traditional IRAs, you need to make Required Minimum Distributions (RMDs) at age 70 ½ or pay a 50% penalty. The reason the IRS requires this is because the government wants to start collecting all those income taxes you deferred during your working years.
Contributions into a Roth IRA were made with money that has already been taxed. The government has already collected its money. You are not required to make RMDs. Keep this money invested in your Roth IRA until you really, really need it.
RMDs are required for Roth 401(k), 403(b), and 457 accounts, but the withdrawals will be tax-free. You can avoid RMDs on these accounts by rolling them over to a Roth IRA.
Use your Roth IRA as your long-term care account.
I always tell my clients that their Roth IRAs should serve as a way to finance their golden, golden years. It’s there to help them pay for their health care expenses towards the end of their lives. Make sure your stock allocation is high enough so it grows enough to outpace the cost of health care. Remember, Medicare will not pay for long-term care expenses.
The order in which you withdraw funds in retirement is important.
I would start drawing “guaranteed” money first.
- A pension – if you are still one of the few whose employer offers it.
- Social Security – just remember if you start withdrawing before your full retirement age, you will not receive as much. See my column When to Start Taking Social Security.
Then start taking RMDs from your retirement accounts and see if that is enough to live on. Avoid withdrawing more unless you need the money. But always save your Roth IRA for last.
Visit my Withdrawing Money in Retirement column for more information.