Should You Spend Your Roth IRA First or Save It for Last?

Many retirees are told to preserve Roth IRA money for as long as possible. The logic seems straightforward: qualified Roth withdrawals are generally tax-free, Roth IRAs do not require lifetime required minimum distributions for the original owner, and the account can continue compounding without annual income taxes. That makes the Roth look like the last account anyone should touch.

But “Roth last” is not always the best strategy. In some years, using Roth money can help prevent traditional IRA withdrawals from pushing taxable income into a higher bracket, increasing Medicare premiums or making more Social Security taxable. The better approach is usually to decide which account to use year by year rather than following one permanent withdrawal order.

Roth Money Is Valuable Because It Gives You Control

A traditional IRA creates taxable income when money comes out, while qualified Roth IRA distributions generally do not. That difference gives retirees something increasingly valuable as retirement progresses: control over taxable income.

Suppose a retiree needs another $30,000 for a car, major trip or home renovation. Taking the money from a traditional IRA could add $30,000 to taxable income and potentially push the household across an important threshold. Taking a qualified Roth distribution can provide the same spending money without generally increasing federal taxable income. (irs.gov)

That does not mean the Roth should automatically fund every large purchase. Tax-free money is valuable, and using it today means giving up future tax-free growth. The question is whether preserving the Roth is worth the additional tax consequences created by taking money from somewhere else.

Traditional IRAs Eventually Force the Issue

The reason many retirees preserve Roth assets is that traditional retirement accounts eventually create required minimum distributions. Traditional IRAs and most tax-deferred retirement plans are subject to RMD rules, while Roth IRAs do not require distributions during the original owner’s lifetime. (irs.gov)

That can create an imbalance later in retirement. Someone may enter retirement with a large traditional IRA and a smaller Roth, spend mainly from taxable accounts for years, and then discover that the traditional IRA has continued growing into an even larger source of mandatory taxable income.

If future RMDs are projected to be large enough to push the household into higher tax brackets, preserving every Roth dollar while allowing the traditional IRA to grow may be counterproductive. In that situation, taking more from the traditional IRA earlier—or completing Roth conversions before RMDs begin—may produce a better lifetime result.

The withdrawal strategy should therefore look forward rather than simply minimizing taxes this year.

Use Roth Money to Avoid Expensive Tax Thresholds

Roth withdrawals become particularly useful when a retiree is close to a tax threshold. Imagine that taxable income is already near the top of a preferred bracket and the household needs another $20,000 before year-end. A traditional IRA withdrawal could push part of that income into a higher marginal rate, while a qualified Roth withdrawal generally would not.

The same principle can apply to Medicare. Higher modified adjusted gross income can trigger IRMAA surcharges on Medicare Part B and Part D, so retirees close to one of those thresholds may choose Roth money for additional spending rather than generating more taxable IRA income.

Social Security can create another interaction. Traditional IRA distributions can increase provisional income and potentially cause more Social Security benefits to become taxable. Qualified Roth distributions generally do not have the same effect on federal adjusted gross income.

In those situations, the Roth is functioning less like a spending account and more like a tax-management tool.

Roth Withdrawals Don’t “Fill” a Tax Bracket

One important misconception is that retirees should take Roth withdrawals to fill unused low tax brackets. A qualified Roth withdrawal generally is not included in taxable income, so it does not use tax-bracket space in the way a traditional IRA withdrawal or Roth conversion does.

If a retiree has unused room in a low tax bracket, the better strategy may be to take additional traditional IRA income or complete a Roth conversion. That deliberately recognizes income at a rate the household considers attractive.

The Roth can then be used for any remaining spending needs without adding more taxable income. This combination can allow someone to deliberately fill a chosen bracket while avoiding an accidental jump above it.

That distinction is important because the objective is not simply choosing between Roth and traditional accounts. It is coordinating both.

Sometimes Spending Roth First Makes Sense

There are situations where using Roth assets earlier can be reasonable. One is when future taxable income is expected to decline rather than increase.

Suppose a retiree has unusually high income today but expects future traditional IRA withdrawals to fall into lower tax brackets. Spending Roth money during the higher-income years could avoid adding even more taxable income now, while preserving the traditional IRA for years when withdrawals may be taxed at lower rates.

Another example involves a large one-time expense. A retiree who needs $100,000 for a home purchase, renovation or family need may prefer to combine several funding sources rather than taking the entire amount from a traditional IRA and creating a major tax spike.

The Roth can help smooth taxable income across years instead of allowing one spending event to distort the tax plan.

But Large Future RMDs Can Reverse the Strategy

The opposite can be true when a traditional IRA is projected to grow substantially. If future RMDs are likely to create more taxable income than the retiree wants, spending Roth money early may preserve exactly the account that is creating the future problem.

In that case, withdrawals from the traditional IRA may deserve priority even if they create some tax today. Paying tax at a manageable rate can be preferable to allowing the account to grow until mandatory distributions arrive at potentially higher rates.

This is also where Roth conversions can become more powerful than Roth withdrawals. Instead of simply spending traditional IRA money, a retiree can convert some of it to Roth, pay tax now and move the remaining assets into an account that will not create lifetime RMDs for the original owner.

The best strategy depends on the direction future taxes are expected to move, not on a blanket rule that one account should always be spent first.

Your Heirs Change the Calculation

Legacy goals can also affect the withdrawal order. Roth assets are often attractive inheritance assets because distributions to beneficiaries are generally tax-free if the applicable Roth rules have been satisfied. However, most non-spouse beneficiaries are still subject to inherited-account distribution rules and generally must empty an inherited Roth IRA within 10 years. (irs.gov)

That means leaving the Roth to heirs can be especially valuable when the children or other beneficiaries are likely to be in high tax brackets. They may inherit an account that can potentially be distributed without creating the same taxable income that an inherited traditional IRA would generate.

But the opposite can also be true. If the retiree is in a high tax bracket today and the heirs are expected to be in much lower brackets, aggressively converting traditional IRA money to Roth solely for the heirs may mean voluntarily paying tax at a higher rate than they would have paid later.

Estate planning and retirement tax planning therefore need to be connected. The best account to leave behind depends partly on who is receiving it.

Charitable Giving Often Favors the Traditional IRA

Charitable intentions can change the answer again. Once an IRA owner reaches age 70½, qualified charitable distributions can generally be made directly from an IRA to an eligible charity and excluded from taxable income, subject to annual limits. QCDs can also count toward an RMD once RMDs apply. (irs.gov)

That can make traditional IRA assets particularly attractive for charitable giving. Using Roth money for the same donation may waste some of its tax advantages because Roth distributions could have been tax-free anyway.

A retiree who intends to leave substantial assets to charity may therefore have less reason to convert every traditional IRA dollar to Roth. Traditional IRA assets can be tax-efficient charitable assets, while Roth assets may be more valuable for individual heirs or future personal spending.

The withdrawal order should reflect those estate goals before accounts are depleted.

Roth Accounts Can Function Like Tax Insurance

One useful way to think about Roth money is as a form of tax insurance. You pay taxes before the money enters the account or when completing a conversion, and in exchange you gain protection against the possibility that future qualified withdrawals would otherwise have been taxed at higher rates.

Like insurance, the strategy can appear unnecessary if the feared event never happens. Someone may complete Roth conversions expecting future tax rates to rise, only to discover years later that their tax rate remains low.

That does not necessarily mean the planning failed. The Roth still created flexibility, eliminated lifetime RMDs on those assets for the original owner and provided another source of money that can generally be accessed without increasing taxable income.

Sometimes flexibility has value even when it is never fully used.

No One Knows Future Tax Rates

A major complication is that no one can know exactly what tax rates will look like 10, 20 or 30 years from now. Congress can change rates, deductions, RMD rules and estate laws, while a retiree’s personal circumstances can change just as dramatically.

That means every long-term withdrawal strategy includes assumptions. The goal is not to predict tax law perfectly but to avoid building a retirement plan that works only under one tax scenario.

Maintaining assets across traditional, Roth and taxable accounts creates diversification across tax treatments. If future tax rates rise, Roth assets become more valuable. If rates remain low, traditional IRA withdrawals may be less expensive than feared.

Tax diversification gives retirees the ability to respond rather than predict.

The Best Withdrawal Strategy Changes Over Time

There is no permanent answer to whether Roth or traditional IRA money should be spent first. A retiree’s best choice at 62 may be different at 72, 82 or after the death of a spouse.

During low-income years, traditional IRA withdrawals or Roth conversions may deserve priority. In a year with unusually high income, a Roth withdrawal may help prevent another tax spike. Once RMDs begin, Roth money can help cover additional spending without stacking even more taxable income on top of mandatory distributions.

The strategy should be revisited as account balances, tax brackets, Social Security income, Medicare costs and estate goals change. Retirement income planning is most effective when withdrawals are treated as an annual decision rather than an automatic sequence.

Don’t Preserve the Roth Just to Say You Preserved It

The Roth IRA is one of the most valuable accounts in retirement, but that does not mean it should sit untouched until death. Money exists to support the retiree’s life, and there will be years when Roth assets are the most efficient source for spending.

The important question is what happens if the Roth is spent today versus what happens if the traditional IRA is spent instead. That comparison should include current taxes, future RMDs, Medicare, Social Security and the tax situation of eventual heirs.

Sometimes preserving the Roth until the end is exactly right. Sometimes spending some of it earlier makes the entire tax plan work better.

The goal is not to die with the largest possible Roth IRA. It is to use each account when its tax advantages are most valuable.

You should always consult a financial, tax, or legal professional familiar about your unique circumstances before making any financial decisions. This material is intended for educational purposes only. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns.

Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost.