It's not an easy thing to build up a nice balance in a Roth IRA. Doing so takes time and, in many cases, a savvy investment strategy.
You'd think spending that money would be an easier thing than accumulating it. But actually, many people find that it's tricky to determine when to start tapping a Roth IRA.
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Once you turn 59 1/2, you can take Roth IRA withdrawals without a penalty. And technically, you can take penalty-free Roth IRA withdrawals before 59 1/2 as long as you only touch the principal portion of that account and leave the gains portion alone.
But it's not an easy thing to see your Roth IRA balance get whittled down. So before you begin to take withdrawals, it pays to ask yourself these questions.
1. Am I still working?
The money you take from a Roth IRA could do a lot of things for you -- help you improve your home, upgrade your car, or take some fantastic trips. But if you're still collecting a paycheck, it could make sense to leave your Roth IRA untapped a bit longer if possible.
Remember, the money in your Roth IRA gets to grow on a tax-free basis. So the longer you leave it alone, the more you can benefit.
2. Is it reasonable to cut some expenses and leave my money alone?
Even if you bring a Roth IRA balance into retirement, there's unfortunately no guarantee that your money will last as long as you need it to. If you're worried about depleting your nest egg, before taking withdrawals, see if it's possible to reduce your spending. If you're getting Social Security, for example, and you're able to cover your costs on those benefits alone for a period of time, it could allow your Roth IRA to grow a bit more.
To be clear, though, this advice really only applies to people who are worried about their money running out. With a $95,000 Roth IRA, it's reasonable to reduce spending for a period of time to stretch and grow that money. But if you're sitting on a Roth IRA worth $1.8 million, you shouldn't necessarily force yourself to pinch pennies a few more years for the purpose of leaving your balance intact.
3. Is leaving an inheritance important to me?
One nice thing about Roth IRAs, as opposed to traditional IRAs, is that you're not forced to take required minimum distributions from your account. This means that if you so desire, you could leave your entire Roth IRA balance to your kids, grandchildren, or other important people in your life.
If leaving an inheritance is a priority for you, then you may want to hold off on tapping your Roth IRA for as long as you can. That doesn't mean you should deny yourself a comfortable retirement just to leave money behind. But you may want to be judicious about taking withdrawals if you don't absolutely need to.
The decision to start taking money out of your savings can be surprisingly difficult. Before you start taking Roth IRA withdrawals, consider your need for money and the other income sources you have. Also think about how much money you have in that account and how to use it in the most meaningful way possible. With any luck, you'll come to the right decision.
