You spent decades funding your 401(k), contributing to your Roth IRA, and keeping money in taxable brokerage accounts. Now that retirement is here (or nearly here), a new question takes center stage: Which accounts do you draw from first?
The order in which you withdraw from your different accounts can have a meaningful impact on how much you pay in taxes, how long your money lasts, and what you leave behind for your family. Getting it right generally takes more than a simple rule of thumb. Here is what you need to know.
Understanding Your 3 Buckets
Most retirees draw income from three types of accounts in their portfolio, each with different tax treatment:
Taxable accounts [for example, brokerage accounts, savings accounts, and certificates of deposit (CDs)] are funded with your after-tax dollars. Investment gains are taxed as capital gains when you sell, but you have a lot of flexibility with how and when you access the money.
Tax-deferred accounts [such as traditional IRAs, 401(k)s, and 403(b)s] are funded with pre-tax dollars and grow tax-deferred over the years. Every dollar you withdraw in retirement is taxed as ordinary income.
Tax-free accounts [e.g., Roth IRAs and Roth 401(k)s] are funded with after-tax dollars, and qualified withdrawals are completely tax-free, including the growth.
The Traditional Sequencing Strategy
For many retirees, the conventional approach goes in this order:
Draw from taxable accounts first.
Then move to tax-deferred accounts.
Preserve tax-free Roth accounts for as long as possible.
The order can make sense because it lets your tax-advantaged accounts continue growing while you spend down taxable assets first. And since Roth accounts have no required minimum distributions (RMDs) during your lifetime, they can keep compounding tax-free until you need them.
Why It Is Not Always That Simple
Here is where it gets nuanced. Following that sequence too rigidly could cost you more in taxes over time.
RMDs change the picture. Starting at age 73 (or 75 if you were born in 1960 or later), the IRS requires you to withdraw a minimum amount each year from your tax-deferred accounts, whether you need the money or not. If those accounts have large balances, the forced withdrawals can push you into a higher tax bracket, increase the taxability of your Social Security benefits, and trigger higher Medicare premiums.
Lower tax brackets in early retirement are an opportunity. If you retire before Social Security kicks in, you may have several years of relatively low income. That window is often an ideal time to do Roth conversions, intentionally moving money from your traditional IRA into a Roth IRA at a lower tax rate. Done strategically, this can reduce future RMDs and lower your lifetime tax burden.
Mixing and matching often makes sense. Rather than draining one bucket completely before touching another, many retirees benefit from drawing from multiple account types simultaneously, keeping taxable income in a favorable range year after year. This approach requires careful planning to execute well.
State taxes and healthcare matter too. Depending on where you live, state income taxes may play a role in which accounts to tap. And for retirees who purchase health insurance through the ACA marketplace before Medicare eligibility, keeping income below certain thresholds can help preserve premium subsidies.
Every Situation Is Different
In the end, there is no universal answer to this question of which accounts to draw from first. The right withdrawal strategy can depend on your total assets, tax situation, Social Security timing, spending needs, estate planning goals, and more. A strategy that works well for your friend may not be the best fit for you.
We Can Help You Find the Right Order
At Hassell Wealth Management, helping clients determine the most tax-efficient way to draw income from their accounts is a core part of what we do. We look at your complete financial picture and build a distribution strategy to help protect your wealth, minimize unnecessary taxes, and support the retirement you have planned for.
If you are approaching retirement or are already there and have questions about where to start drawing income, we would love to help. Schedule a complimentary discovery call with one of our fiduciary, fee-only financial advisors today.