The Shocking Truth About Retirement Withdrawals Most People Get Wrong: Which Account to Tap First?
Picture this: You’ve spent decades stacking up investments across multiple accounts—401(k)s, IRAs, Roth IRAs, taxable brokerage accounts, maybe even a 457(b). Now, retirement is here. The paycheck stops, but the bills don’t. So, how do you start withdrawing your money in the most tax-efficient way while making sure it lasts?
Most people don’t realize that the order in which you withdraw your money can significantly impact your tax bill and how long your portfolio lasts. Get it wrong, and you could be sending thousands (or even hundreds of thousands) of dollars to the IRS that could’ve stayed in your pocket. Get it right, and you maximize your income, reduce taxes, and extend the life of your nest egg.
Let’s break it down step by step.
Step 1: Use Taxable Accounts First
Your brokerage account is your best friend in the early years of retirement. Why? Because it’s already been taxed. You only pay taxes on capital gains, dividends, and interest, making it an ideal first source of cash.
Why start here?
- You avoid pulling from tax-deferred accounts early, letting them grow longer.
- You control your tax bill by strategically selling investments with long-term capital gains (which are taxed at a lower rate than ordinary income).
- If you have cash sitting in your brokerage, you can use that first without triggering capital gains.
🚀 Pro move: Use the 0% capital gains tax bracket if you’re in a lower income range (single filers under $47,025 or married filing jointly under $94,050 in 2024).
Step 2: Tap Your Tax-Deferred Accounts (401(k), 403(b), 457(b), Traditional IRA)
Once you’ve taken advantage of your taxable accounts, it’s time to start drawing from tax-deferred accounts like your 401(k), 403(b), 457(b), and Traditional IRA.
Why?
- Required Minimum Distributions (RMDs) kick in at age 73 (or 75 if you’re younger). If you don’t withdraw, Uncle Sam will force you to.
- These withdrawals are taxed as ordinary income, so taking them too early (before you need them) can spike your tax rate.
- If you retire before age 59½, penalty-free access is limited, but 457(b) plans allow penalty-free withdrawals at any age if you’ve separated from service.
🔑 Key: If you’re in your early retirement years (before RMDs), consider pulling just enough from these accounts to stay in a lower tax bracket.
Step 3: Convert to a Roth IRA (If It Makes Sense)
This is where things get fun. Roth conversions allow you to move money from your tax-deferred accounts into a Roth IRA. Why would you do this?
- Roth withdrawals are tax-free forever.
- No RMDs. Ever.
- Converting at a lower tax rate means you pay less in taxes over time.
💡 Best time to do a Roth conversion: Early retirement years, before Social Security and RMDs kick in. If your taxable income is low, you can convert a portion of your Traditional IRA or 401(k) into a Roth at a reduced tax rate.
Step 4: Use Roth IRAs Last
Roth IRAs are your golden ticket—the account you want to touch last, if possible.
Why?
- You’ve already paid taxes on Roth contributions, so withdrawals are completely tax-free.
- There are no RMDs, meaning this money can continue growing tax-free for decades.
- If you don’t need the money, it’s the best account to pass on to heirs (thanks to tax-free growth).
🏆 The goal: Let this account compound as long as possible.
Step 5: Factor in Social Security Timing
Deciding when to take Social Security is a huge piece of the puzzle. The longer you wait (up until age 70), the bigger your monthly check. If you can, use your other accounts to cover expenses and delay Social Security for maximum benefits.
📊 Claiming early (62-66): Smaller monthly checks but more years of payments.
📈 Delaying until 70: Increases benefits by about 8% per year after full retirement age.
Pro tip: If you have a lower-earning spouse, they might want to claim earlier while the higher earner delays.
My Ideal Withdrawal Sequence
Here’s the general retirement withdrawal strategy to maximize income and minimize taxes:
1️⃣ Taxable accounts first (capital gains and dividends are more tax-efficient).
2️⃣ Tax-deferred accounts (401(k), IRA, 457(b)) next, staying in a low tax bracket.
3️⃣ Strategic Roth conversions in early retirement years to reduce future RMDs.
4️⃣ Social Security optimization to boost guaranteed income.
5️⃣ Roth IRAs last—let them grow tax-free for as long as possible.
Get This Right, and You Keep More of Your Money
Retirement isn’t just about how much you’ve saved—it’s about how you withdraw it. The right strategy can make your money last decades longer while keeping your tax bill low.
The key is flexibility. Every retirement plan is unique, and life happens. But if you follow this roadmap—using taxable accounts first, managing tax-deferred withdrawals wisely, and preserving Roth IRAs for last—you’ll be well on your way to a tax-efficient, stress-free retirement.
