Which Retirement Account Should You Withdraw From First?

The order you withdraw from your retirement accounts can save or cost you hundreds of thousands in taxes. Understanding which accounts to tap first is crucial for maximizing your retirement wealth and minimizing your tax burden.

The Retirement Income Decision That Makes or Breaks Your Golden Years

Your paycheck stops. Now what?

After decades of saving and building wealth, you're suddenly faced with one of the most critical financial decisions of your lifetime: which retirement accounts should you tap first?

Most retirees approach this decision casually. They might take a little from their 401(k), some from their IRA, maybe touch their brokerage account, whatever feels right at the moment.

But here's what they don't realize: the sequence you follow when withdrawing from different account types can have a massive impact on how long your money lasts and how much you'll pay in taxes over your retirement.

Some withdrawal strategies can save you hundreds of thousands of dollars. Others can cost you just as much through unnecessary taxes and poor timing.

Let me show you the optimal withdrawal sequence that can add nearly $1 million to your retirement wealth, using real examples that reveal why the order you touch your accounts changes everything about your financial future.

Your Guaranteed Income Foundation

Before you touch a single investment account, you need to map out what money is already coming through the door.

Think of this as the foundation of your retirement house. You need to know exactly what Social Security, pensions, rental income, or annuity payments you'll receive and when they start.

Here's why timing matters more than most people realize:

Let's say you need $10,000 monthly to live comfortably. If Social Security provides $4,000 monthly, you have a $6,000 gap to fill from your savings. That's $72,000 annually.
But what if you retire at 62 and delay Social Security until 70 to maximize your benefit? Suddenly you have eight years where you need to cover that entire $10,000 monthly need from your portfolio, a $120,000 annual gap.

This isn't necessarily bad news. Those early retirement years, before Social Security kicks in, actually give you incredible tax planning flexibility. You can take advantage of low-income years to do Roth conversions and dramatically reduce your lifetime tax bill.

The key is knowing your fixed income sources, understanding the gap between those sources and your expenses, and calculating exactly how much you'll need to pull from your portfolio each year.

The Three Account Types That Determine Your Tax Bill

Not all retirement accounts are created equal. Each type has different rules, and understanding these differences is crucial for smart withdrawal decisions.

Taxable Brokerage Accounts: ("Flexible")

There are no rules or penalties for when or how much you withdraw. This is money you've already paid taxes on. When you sell investments, you typically pay capital gains tax on the profit. But here's the game-changer: if you're married and your taxable income stays under $96,700, you pay zero capital gains taxes on long-term investments.

Tax-Deferred Accounts: ("IOU to Uncle Sam")

Your traditional 401(k) and IRA gave you tax deductions when you contributed, but the IRS wants their cut when you withdraw. Every dollar comes out as ordinary income, just like a paycheck. The challenge: at age 73 or 75, required minimum distributions (RMDs) force you to withdraw whether you want to or not.

Tax-Free Accounts: ("The Golden Goose")

Roth IRAs and Roth 401(k)s contain money you already paid taxes on. Now it grows and comes out completely tax-free forever. This is often your most valuable money because you'll never pay taxes on it again.

Understanding these three account types is like knowing which tools to use for which job. Each serves a different purpose in your retirement income strategy.

The Tax Bracket Strategy That Changes Everything

Most people think retirement planning is just about having enough money. Wrong. It's about having enough money AND keeping as much as possible by minimizing taxes.

Let me show you exactly how this works with John and Sara, who have $1.6 million saved:

Combined 401(k)s: $750,000
Traditional IRAs: $250,000
John's Roth IRA: $100,000
Joint taxable account: $500,000 (with $325,000 in capital gains)

They retire at 60, need $70,000 annually, and won't start Social Security until 67.

The Common Approach: Taking From Multiple Accounts

Many retirees spread their withdrawals across different account types, thinking this provides balance and diversification.

The Strategic Approach: Optimized Sequencing

Taxable accounts first
Tax-deferred accounts second
Roth accounts last

The difference? Over $900,000 in additional tax-adjusted wealth.
For six years after retirement, John and Sara pull from their taxable account and pay zero federal taxes. Their income stays under the long-term capital gains threshold, allowing them to withdraw over $100,000 annually tax-free.

This creates a perfect tax valley for Roth conversions. By filling up the 12% tax bracket with strategic conversions, they add another $1.8 million in tax-adjusted wealth.

Hidden Taxes That Destroy Retirement Plans

While you're optimizing your withdrawal sequence, three hidden taxes can ambush your strategy:

Social Security Taxation. Pull too much from tax-deferred accounts, and up to 85% of your Social Security becomes taxable. This creates a vicious cycle where every extra dollar of IRA withdrawal pulls more Social Security into taxable territory.
Medicare IRMAA Premiums. High income triggers Medicare premium surcharges that can add hundreds of dollars monthly to your healthcare costs. These premiums look back two years, so today's withdrawal affects future Medicare costs.
Required Minimum Distributions. Starting at age 73 or 75, the government forces you to withdraw from traditional accounts whether you need the money or not. For many retirees, RMDs reach six figures, pushing them into higher tax brackets when they're most vulnerable.

This is why smart retirees pull money from traditional accounts early in retirement and do Roth conversions to keep balances manageable and avoid massive RMDs later.

The Optimal Withdrawal Strategy

Phase 1: Early Years (Before Social Security) Start with taxable accounts. With no other income, you can often withdraw $100,000+ and pay zero federal taxes due to the 0% capital gains rate.
Phase 2: Fill the Low Tax Brackets Once you have other income sources, strategically fill lower tax brackets with traditional IRA or 401(k) withdrawals. Take just enough to hit the top of the 12% bracket, then stop.
Phase 3: Tax-Free for Additional Needs For extra income, turn to taxable accounts (paying only capital gains) or Roth accounts (paying nothing).
Phase 4: Preserve the Golden Goose Keep Roth accounts for last. Let them grow as long as possible because every dollar of growth is tax-free, distributions are tax-free, and you can pass them to heirs tax-free.

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