How a Roth IRA Works After Retirement

The Roth individual retirement account (IRA) has skyrocketed in popularity with Americans looking to stash money away for retirement. As of 2022, 24.6% of U.S. households (32.3 million households) owned a Roth IRA, and it remains the second most heavily used type of IRA behind a traditional IRA.

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 up front but none on distributions, they work well for people expecting to be in a higher tax bracket once they retire.

Roth IRAs also offer some other unique advantages to savers when it comes to taxes, distributions, and the ability to pass on wealth to the next generation.

Roth Individual Retirement Accounts (IRAs): An Overview

Although the Roth IRA shares many similarities with the traditional IRA, there are a few key differences between the two retirement accounts. Contributions to a Roth IRA are not tax-deductible upfront. You pay your contributions out of your current after-tax income. On the other hand, you can withdraw your contribution at any time without penalty.

Once you start taking qualified distributions from a Roth IRA, you are not taxed on the earnings that your contributions made over the years. A Roth IRA accrues earnings on a tax-deferred basis, and those earnings will be tax-free.

There is no age limit for making Roth IRA contributions, as long as you have earned income. Finally, Roth IRAs do not have required minimum distributions (RMDs) during your lifetime.

IRAs are popular investment vehicles, especially among young Americans. According to Fidelity Investments, the number of IRA accounts increased to 14.3 million, which is a jump of 11% from 2022. People of all generations choose to invest in Roth IRAs, with more than 59% of contributions going to these accounts in the second quarter of 2023.

There are two primary reasons for this, both stated above. First, young investors may appreciate the flexibility of being able to withdraw their retirement contributions with no penalty. Second, young investors just starting out their careers are often in lower tax brackets. As such, it's more advantageous to convert to a traditional IRA for immediate tax deductions once they become higher earners.

Making Roth IRA Contributions

As we mentioned earlier, no matter how old you are, you can continue to contribute to your Roth IRA as long as you earn income—whether you receive a salary as a staff employee or 1099 income for contract work.

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.

Contribution Limits

The maximum Roth contribution for 2023 is $6,500, plus $1,000 if you’re 50 or older by the end of the year. This $1,000 addition is called a catch-up contribution. The maximum Roth contribution for 2024 is $7,000, plus the $1,000 catch-up contribution.

Contributions must be made by the tax filing deadline of the following year, including any extensions. For example, you can make a contribution to your 2023 IRAs through April 15, 2024, or later if you file for an extension.

Income Limits

Roth IRAs have income limits that affect whether and how much you can contribute. Certain income levels can still make partial contributions to a Roth IRA, while higher income levels are excluded from contributing.

• Taxpayers earning below the lowest figures in the table below corresponding to their filing status may make full Roth IRA contributions.
• Taxpayers earning within the figures in the table below corresponding to their filing status may make partial Roth IRA contributions.
• Taxpayers earning more than the figures in the table below corresponding to their fling status are not permitted to make Roth IRA contributions.

You can’t pay money into a Roth IRA if you don’t have earned income. However, your spouse 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.

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 years old and the account has been open for five years or longer.

If you tap into earnings before this time, you likely will have to pay taxes and penalties on the withdrawals. Withdrawals are typically 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 (qualified distributions) from your Roth IRA earnings before you turn 59½.

For example, if you use the money to buy, build, or rebuild a first home for yourself or a family member, it would be considered a qualified distribution. This is limited to $10,000 per lifetime. You also may take distributions 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 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 RMDs 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.

While non-spouse heirs must take RMDs 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 valuable benefits after retirement. You not only can take tax-free withdrawals from a Roth but also have maximum flexibility for when and how much you withdraw.

This means that 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.