When to Withdraw from a Roth in Retirement

When should you withdrawal money from a Roth account in retirement? Roth IRAs or Roth 401(k)s are great long term retirement accounts to have. The money in these accounts grows tax free, and the proceeds will also be tax free for any heirs that inherit the account. For that reason, Roth IRAs are typically kept until later in retirement before being used.

However, it is important to know that there are a few times that can be very advantageous to withdrawal from a Roth in early retirement:

Keep Your MAGI Low for Lower Health Insurance Costs

First, if you are retiring before you are eligible for Medicare and if you are purchasing health insurance on the healthcare.gov marketplace, your monthly insurance premium will depend on your Modified Adjusted Gross Income, or MAGI.

Using your Roth in these early years of retirement instead of a traditional IRA will keep your MAGI low. This may help you save hundreds or thousands of dollars per month on your health insurance premium.

The monthly tax credits available will depend on the state you live in and your other sources of income. You will need to do analysis, or hire a financial advisor to help you, to determine if it is worth tapping your Roth accounts early in retirement for this savings.

 

To Avoid Medicare IRMAA

Once you are age 65 or older and retired, you will be on Medicare for your health insurance. While on Medicare, if your income is above certain thresholds, you will trigger IRMAA, or the surcharge that gets applied to your Medicare premium based on your income.

For example, in 2024 here is how increased income would raise your monthly Part B Medicare premium:

This is a tax that can come into play if your income is just $1 above a certain threshold and cost a retired couple thousands of dollars per year.

Because of this, monitoring your income during the year is really important if you are close to one of these income thresholds. If you can take just a few thousand dollars from a Roth during the year to avoid triggering IRMAA, it is usually well worth it.

 

Avoid High Tax Rate on Large IRA Withdrawals

Finally, if you have a large one-time expense during the year. Perhaps buying a car or a retirement home, it may be advantageous to use some money from the Roth to avoid other retirement account withdrawals being taxed at higher tax rates.

As you take out more and more money from a traditional IRA in retirement, the marginal tax rate applied to those withdrawals will increase. Large one-time withdrawals can sometimes cause retirees to jump into very high tax brackets, and force them to pay a significant tax bill.

Using Roth money can avoid these high tax rates, and can be very advantageous if your marginal tax rate is very high in a single year.

We have more detail on how we create tax-efficient withdrawal plans in a blog post here.

 

Use Roth When Taxes are High

Ultimately, it makes sense to use Roth money when the cost of taking money from other retirement accounts is much higher than it will be in the future. Withdrawing from Roths unnecessarily can be wasteful, but tactical withdrawals as part of a tax-efficient retirement strategy can make a lot of sense.