5 Must-Know Rules for Roth IRA Withdrawals | Retirement Tax Strategy Guide

Withdrawing money from your Roth IRA? Here are five rules you need to know. Hey, I'm Casey Weade, CEO and founder here at Howard Bailey Financial. Also a certified financial planner practitioner. We're here to answer a question. When should you be taking money from your Roth IRA in retirement? Now, this question actually came from one of our viewers called into the office, asked this question, and we said, we need to know a little bit more about your situation.

And if we don't know any more about your situation, it could end up costing you thousands of dollars. Now frustrated as the caller was just wanting that straightforward answer, we knew we couldn't provide it because we needed to know more. There's five key things that we need to know in order to provide the very best answer when it comes to where to draw money from in retirement from your various accounts. And those different accounts, are your taxable accounts, your tax deferred accounts and those tax free accounts, your 1099 accounts or those tax deferred accounts like your IRAs and 400 and K's, and then those Roth IRAs, Roth for one K is falling into that tax free bucket. And so now we're just focusing on this Roth account. And we're going to address this by following each one of these five rules. And I think after this video you'll be able to follow this checklist in order to make a better decision for yourself and your financial future.

Now, the first thing that we need to ask is how old are you? Now why do we need to know how old we are? Because there's a couple of different rules that fall into this category. That is five years and 59.5. We need to make sure we're following these two rules. So one, we need to own our Roth IRA for at least five years in order to avoid any taxes or penalty taxes on those dollars. And if we're less than 59.5, we have to pay a penalty tax on our earnings when we take dollars out of that Roth IRA.

The dollars that you put into that Roth, you don't have to pay any taxes or penalty taxes on it, regardless of how long you've owned the Roth, regardless what your age is, those dollars are going to come back to you as just a return to capital. You already paid taxes on those dollars. They're going to come back to you. Now, if you're under the age of 59.5, though, now your earnings are going to be taxable and you're also going to face a 10% penalty tax on those earnings. And regardless of whether you are under 59 half or over 59.5, you need to have owned that Roth IRA or a Roth IRA for at least five years prior to your first distribution.

If you're under 59.5, we still have to worry about penalty taxes and taxes. If you're over 59.5 and you've only known that Roth IRA for a couple of years, we do have to concern ourselves with paying taxes on our earnings. We don't have to concern ourselves with the penalty tax, but we could still find those earnings being taxable over the age of 59.5. So we need to own the Roth IRA for five years and be over the age of 59.5 before we start taking distributions. The second question where is your retirement savings? How much do you have in each one of these buckets? Go ahead and take out a scratch piece of paper. Add up all those dollars you have in those taxable accounts. All those dollars you have in the tax deferred account, how much you have in the tax free account.

"And the reason we're asking this is because typically you want to follow the advice of spending down the taxable money, spending down the tax deferred money, then spending down the Roth last. Typically, the Roth needs to be saved to be the very last thing that you touch. That's a general high level advice. However, let me give you a nuance.

What if you are really focused on legacy and you want to leave assets behind to the next generation? You want to maximize what your legacy assets are going to be? Well, it's going to be much better that they inherit that Roth IRA than any one of those other buckets. If they inherit the taxable bucket. Yeah. Your beneficiaries will receive a step up in basis, but then they have to reinvest those dollars and they lose any tax benefits on an ongoing basis. They inherit those tax deferred dollars an IRA for instance. Now they're going to be forced to distribute those assets out over a ten year period with minimum distributions along the way. That could be at the peak of their earning years. Now, the Roth IRA, on the other hand, they still have to take minimum distributions over the ten year window that they inherited those dollars.

However, they're still preferring the tax free nature of that account for up to ten years, potentially on the bulk of those assets. That's what makes that the best legacy asset. But what if you're focused on legacy and it's not your children? What if it's charity? Or if it's charity, then why don't we go ahead and spend the Roth IRA and leave the IRA behind to charity? Where we don't won't have to worry about the legacy taxes on that asset as it's going to charity. This is why it's so important to know where all those different accounts are. Now we're getting the question number three. Question number three is what tax bracket are you in. We want to know what tax bracket you're in today and what tax bracket you're going to be in in the future.

So one of the ways that we need to look forward into the future is we need to project your future IRA distributions. Your required minimum distributions. You'll have required minimum distributions after the age of 73 or 74, depending on when you're born. And those RMDs are going to increase year after year in retirement and could be forcing you into a higher tax bracket in the future.

So we want to project forward what those future IRA distributions are going to show up as on your tax return. What future bracket are you going to be in? Where are you at today? In addition to just looking at today, maybe we want to maintain a certain tax bracket. Maybe you're in the 12% bracket and you say, well, I can't take any more money out of any of these different accounts.

So now we're going to take distributions from a Roth in order to make sure we don't jump into the next higher bracket, the 22% bracket on additional dollar. We may want to take blended distributions from these different sources in order to maintain a certain bracket. Maybe it's a little bit from the Roth, a little more from the IRA, and a little more from that taxable account. So this is why it's so important to know your current tax situation. Now we get to our next bullet number four. So number four has to do with insurance. And let's ask it this way. Are you on Medicare or not? If you're on Medicare, We want to know if you're on Medicare because your Medicare premiums are impacted by your MAGI, your modified adjusted gross income.

So any distributions you're taking from traditional IRAs are going to increase that modified adjusted gross income along with all your other income sources, maybe pension income, some 1099 income, rental income, etc.. So we want to potentially focus on minimizing how much income we have. Maybe we're at a really a really dangerous threshold that's going to increase our Medicare premium penalties.

And those thresholds can push us into paying significantly higher premiums. We could be paying $185 a month. We could be paying over $600 a month, depending on our income. And that's just Medicare premium penalties. Now, what if you're not on Medicare? If you're not on Medicare and you're on a private exchange, then you may want to keep your income under certain thresholds in order to qualify for subsidies. That number in the state of Indiana is about $80,000 for a couple. If we keep that income under that $80,000 threshold, then we can reduce your traditional health insurance premiums, potentially all the way to zero. And so that's why it's so important for us to know what your health insurance situation is. Now we're going to step on to number five.

Number five is are you drawing Social Security? If you're drawing Social Security benefits, you may also want to stay under certain income thresholds to avoid paying more taxes or any taxes for that matter on your Social Security benefits. Your Social Security benefits can be taxable. Up to 85% of those benefits can be taxable. It's going to be somewhere between 50% and 85%. Or it could be zero. If you're under the threshold, we know it's going to be zero. If you're single, those thresholds are 25,000 to 34,000. If you are a married couple, it's going to be 32,000 to 44,000. And this is based on something known as combined income. Combined income is made up of your AGI plus half your Social Security benefits and any tax free income.

So we would also want to know do you own any municipal bonds. Because we need to be able to factor this combined income number. And we may want to take distributions from Roth or blended distributions in order to avoid paying additional dollars in taxes on our Social Security benefits. So what have we covered? What are the things that we need to know?

We need to know what your age is. We need to know how much you have in each one of these accounts, what your current tax bracket is. If you're taking Medicare, and if you're on Social Security in order to make the best, most efficient decision for your bottom line in retirement. If you want some help walking through this process to determine which one of your accounts you should be drawing from first, in retirement, all you have to do is call the number on your screen to schedule a no obligation consultation with one of our financial advisors, virtually or in person.