Ditching Roth IRA for low income retirees

Now that I have little income after retiring, I’m thinking about ditching Roth IRA contributions (and actually withdrawing all my basis in Roth IRAs) to iinvest the money in “taxable” investments instead.

I was hoping to get the smart fatwallet/fragiledeal minds to double check my understandings first:

For people in the 10/12% tax brackets, my understanding of comparing roth vs taxable goes like this:
Income used to fund: both taxed at 10/12%.
While growing before needed: the Roth dividends/capgains are tax-exempt, taxable account dividends/capgains are “taxable” but rate is 0% lt capgains rate
Access <59.5: Roth is tax-free for basis but gains are taxable + 10% penalty. Entire taxable sale would be at 0% capgains rate
Access >59.5: Roth is tax-free, again entire taxable sale would be at 0% capgains rate

So the only difference for those with low income is that Roth earnings are taxed more if withdrawn < 59.5, otherwise they are equivalent? And maybe losing the savers credit (which I’ll lose for 3 years anyway after withdrawing the existing Roth basis)

Or am I completely missing something?

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Dividends, at least ordinary dividends (vs qualified dividends), would be taxable at your ordinary income rate and don’t benefit from the 0% QDI/capital gains bracket. Qualified dividends could be taxable if you don’t hold the stock long enough in a taxable account. In addition, if you have any short term capital gains, those wouldn’t qualify for the 0% bracket (which is for long term only) and so those would be similarly counted as income.

In these ways, a Roth is better than taxable even for those saving while in the lowest tax bracket. Inheritance for Roth IRAs is also better for your heirs than taxable also, since they can inherit the tax advantages of the retirement account instead of just taxable funds.


In addition to what xerty said, how much are these taxable investments going to gain? If your capital gains when selling is large enough, it’ll no longer be taxed at 0%.

If your income is low, are you looking at health care subsidies? IRA gaines do not count as income when considering income-based qualifying, while taxable dividends and capital gains do count (even if taxed at 0%).

I’d stick with the no-tax IRA, and risk the 10% penalty if you need to withdraw some of the earnings prematurely. That early access is, at best, the only advantage of withdrawing everything now. And there’s so much potential downside.


Another aspect is future-proofing in my opinion. Tax brackets may change. Tax treatment of dividends, capital gain distributions, etc… may increase. And money withdrawn from Roth won’t be able to get back into it easily if tax brackets change later on. I just don’t see the upside of taking money out of it now.

Aside from inheritance advantages, taxable investment are also not protected from bankruptcy like IRAs are. It may be a minor thing but imagine you get sued, taxable account are fair game assets to go after while IRA money (up to $1.3M I think) is untouchable.


Exactly, making your yearly Roth contribution is basically a no-brainer as long as you don’t anticipate needing anything over the basis before 59 1/2.

The more interesting question long-term is whether it’s worth converting tIRAs to Roths every year up to the top of the 22% bracket, because there are a number of factors in play there (state tax rates, ACA subsidies, how you pay taxes on the conversions etc.). It’s a much harder call to make IMO.

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It addition, some states offer full protection to IRAs.

I’m a bit confused by the OP. If you’re already retired, do you have any earned income at all? If not, you can’t make any more contributions to a Roth IRA. I agree with others that say, leave the money in the Roth IRA unless you absolutely need some to live on. Taxation of the gains if withdrawn before 59.5 applies to everyone, regardless of low income or high income.

Sounds like OP has earned income between $12,000 and $52,525 (if single) or $24,800 and $105,050 (if married).

Good discussion above, including some gotchas I hadn’t thought about (inheritance & health care subsidies, especially)

Re capital gains being large enough when withdrawing to knock one out of the 0% LTCG bracket (and somewhat mitigating the inheritance issues), I believe the correct strategy in this case would be to harvest the gains yearly at 0% up to the maximum allowed at that bracket to increase the basis (no wash-gain rules AFAIK)

I’ll add my personal situation since asked (not as a retort to the valid critiques made already):
~20 years from 59.5
Spouse has ~$45k earned income after maxing 401k & HSA
Small unearned income from rentals.
No non-charity heirs beyond spouse.
Primary residence in no-income-tax state.

Net worth division:
47% pre-tax 401k/tIRA/HSA
34% real estate (primarily equity in rentals)
14% post-tax roth
5% cash
0% taxable investments

^ just typing that it seems like for tax-rate diversity I should actually be converting a portion of pre-tax money into a more-reasonable amount of cash/taxable, if anything, instead of raiding the roths.

I dont think there is such a thing as “tax rate diversity”? No tax is always better than some tax, low tax is always better than high tax. That remains true whether 1% or 99% of your assets are being taxed at any one particular rate. The only goal (from a tax perspective) is to get all you can taxed at the best rate possible.

If eligible, I’d focus on converting that pre-tax IRA to Roth money. Withdrawing it to a taxable account would be a step backwards.



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OP responded with much more relevant info after I made my post, most particularly that there is earned income from a spouse. I did note the part about “little income” but that income might not have been earned income, which is required for contributions to a Roth IRA/IRA. Some people retire with passive investment income, a pension, or a large enough nest egg to draw on until they can collect Social Security.

Obviously true, but without a crystal ball to see future tax rate changes (or even income changes) over a 20+ year horizon, I would argue the choice of when the tax occurs is not such a black/white decision.

But its not just a 10% penalty, if I understand correctly. What would have been capital gains in a taxable account and taxed at 0% are now ordinary income when coming out of the Roth IRA and taxed accordingly. So its more like a 22% penalty for any unforeseen access to the roth IRA earning.

I think the tradeoffs of pre vs. post tax vehicles are more obvious, so the idea here is to explore the pros/cons of roth vs taxable when low income negates the obvious tax rate benefits that are traditionally referred to when espousing the benefits of roths.

So far the tradeoffs appear so far to be (assuming no state income tax and investments that are primarily equities held long term paying qualified dividends and capital gain distributions, i.e. an s&p index fund):
taxable: access to gains (and basis for more than just 1-time occurrence or 60 day use) while still <59.5
roth: bankruptcy/legal protection, earnings dont increase AGI for healthcare / other subsidies, inheritance benefits

Since I agree the un-penalized access to gains is the only benefit (although I’m not personally very impressed by the strength of the downsides) and continued contributions dont impact the future consideration of withdraw or not, I guess its really a moot point up until the time that access is needed/desired.

In my case, I’m now leaning towards just using a 60-day rollover (or 120 with spouse involved) to access some roth basis for my short term needs (buying new fixer-upper house cash followed by selling existing house) and defer the decision to the future (with the backup plan that if i can’t get the funds back in on time, then since they were basis anyway I’m just implementing the strategy i proposed in the first place, to go taxable instead)

There is also an IRS Retirement Savings Contribution Credit for IRA contribution if AGI less than 32K for single, 64K married filing joint. Other restrictions (not a minor, not a dependent, not a full time student etc.)