Most people spend years building up three types of accounts to fund their retirement: a taxable brokerage account, a traditional IRA or 401(k), and a Roth IRA. What they don’t always consider is that the order in which they spend those accounts down can be just as important as how much they have saved.
Get the sequence wrong, and you could pay tens of thousands more in taxes over retirement than you needed to.
Tip: Use our Retirement Withdrawal Sequence Calculator to see how different strategies affect your taxes and how long your money lasts.
The Basic Sequence Most Advisors Recommend
The conventional approach goes like this:
Taxable brokerage accounts first
Traditional IRA and 401(k) accounts second
Roth IRA and Roth 401(k) accounts last
The logic behind each step is straightforward.
When you sell from a taxable brokerage account, you only owe tax on the gain, not the full amount you withdraw. And if you’ve held those investments for more than a year, that gain is taxed at the long-term capital gains rate — 0%, 15%, or 20% for most people — rather than ordinary income rates that can run much higher. Spending this money first also eliminates future taxable growth in the account, which reduces your ongoing tax drag.
Traditional IRA and 401(k) withdrawals are taxed as ordinary income, dollar-for-dollar. The money has been compounding tax-deferred, which is valuable — but the IRS is owed its share on every dollar that comes out. You want to let those accounts keep growing as long as possible, but not so long that required minimum distributions (RMDs) force large withdrawals later.
Roth accounts are last because they’re the most valuable money you have in retirement. Withdrawals are tax-free. Growth is tax-free. And Roth IRAs have no required minimum distributions during your lifetime. Every year you leave a Roth account untouched, it compounds without any future tax consequence. Spending it early permanently gives up that advantage.
The RMD Problem
Here’s where the sequencing becomes really important. Once you turn 73, the IRS requires you to take minimum distributions from your traditional accounts, whether you need the money or not. Those distributions are taxed as ordinary income.
If you’ve left a large traditional IRA untouched for years while drawing down other accounts, RMDs can push you into a higher tax bracket, increase the portion of your Social Security benefits that’s taxable, and trigger higher Medicare premiums through IRMAA surcharges.
The conventional sequence helps prevent this by drawing down the traditional account gradually through retirement rather than letting it balloon unchecked.
When the Conventional Sequence Isn’t Optimal
Many financial planners now suggest a more flexible approach: in the early years of retirement, before Social Security kicks in and before RMDs begin, consider intentionally pulling some money from your traditional accounts, even if you don’t need to, and converting some of it to a Roth. This is called a Roth conversion strategy.
The idea is to “fill up” a lower tax bracket in years when your income is relatively low. Paying 22% in tax now to move money into a Roth can be a better deal than paying that same rate (or higher) later when RMDs stack on top of Social Security income.
The right answer depends on your specific balances, tax situation, state of residence, and Social Security timing. There’s no universal sequence that works for everyone.
This Matters Before You Retire, Too
The withdrawal sequence only gives you flexibility if you actually have money spread across all three account types. If everything you’ve saved is in a traditional 401(k), every dollar you pull in retirement gets taxed as ordinary income — you don’t have options.
If you’re still working, it’s worth looking at your current mix. Are you building toward having something in each bucket — taxable, traditional, and Roth? That might mean directing some contributions to a Roth 401(k) or Roth IRA instead of pre-tax accounts, especially if you expect to be in a similar tax bracket in retirement. It might also mean doing small Roth conversions in lower-income years before you stop working.
You don’t need a perfect three-way split. You just need enough in each bucket to have choices later.
Run the Numbers for Your Situation
The difference between strategies isn’t theoretical. Depending on your account balances and tax rates, the gap in total lifetime taxes between the best and worst withdrawal sequence can reach six figures.
Use our Retirement Withdrawal Sequence Calculator to compare all four strategies side by side and see a year-by-year projection of your balances and taxes.
The post The Order You Withdraw Retirement Money Matters More Than You Think appeared first on Clark Howard.