Roth IRA's vs. Required Minimum Distributions

In the last couple of posts, I have talked about traditional tax-favored retirement accounts and how the Required Minimum Distribution rules dictate the gradual expiration of their valuable tax-exemption. But Roth IRA’s are different. Required Minimum Distributions don’t have to begin until after your death; or, more accurately, after the death of you and your spouse. So with Roth IRA’s, the end of tax-exemption is dictated by your need for spending money rather than any RMD rules, at least during your lifetime.

This suggests another opportunity for Spigot Planning—the clever choice of which savings bucket you tap first to meet your living expenses.

As an example, consider Jerry and George from yesterday’s post; but let's change the situation. They each still have $1,000,000, but now it’s split equally between a Roth IRA and a taxable investment account. George holds to his naïve approach of taking his spending proportionately between his two accounts. Jerry—clever fellow—first depletes his taxable investment account before tapping into his Roth IRA, thus preserving the Roth IRA’s tax exemption for as long as feasible. Using reasonable assumptions, George projects that he will be able to spend $56,584, increased each year for inflation, before depleting his wealth at age 100. Jerry projects he will be able to spend $59,231 per year, a 4.7% increase. Nice work, Jerry!

Notice how much more meaningful the benefit from Spigot Planning compared to yesterday’s example. That’s because Roth IRA’s have no lifetime Required Minimum Distributions, so there’s more opportunity to benefit from delaying distributions from your tax-favored retirement account.

More to come on Spigot Planning.