You have spent decades saving for retirement. Now comes a question that can be surprisingly difficult to answer: Which account should you spend from first?
Many retirees have money in three different tax “buckets”: taxable brokerage accounts, tax-deferred retirement accounts, and tax-free Roth accounts. Conventional wisdom suggests spending taxable assets first, traditional retirement accounts second, and Roth assets last.
That approach can work. But following it automatically could mean missing valuable opportunities to reduce taxes over your retirement.
The right withdrawal strategy starts with understanding how these accounts work together.
Understanding Your Three Tax Buckets
Taxable brokerage accounts offer flexibility, but they are not free from taxes. Interest and dividends may generate taxable income each year, and selling investments can create capital gains or losses. Your cost basis—the amount you invested—helps determine how much of a sale is taxable.
Traditional IRAs and retirement plans generally produce ordinary taxable income when you withdraw money. Eventually, required minimum distributions, or RMDs, force you to begin taking withdrawals, whether you need the money or not.
Roth accounts offer qualified tax-free withdrawals and no lifetime RMDs for the original owner. Those features make them useful for managing future spending, handling unexpected expenses, and potentially leaving assets to heirs.
Each bucket has a role. The opportunity lies in coordinating them.
Why “Taxable First” Isn’t Always Best
Spending taxable assets first allows retirement accounts to continue growing without annual taxes on their investment earnings. It also preserves Roth assets for later.
The potential problem? You might spend years paying very little income tax while your traditional IRA grows into a much larger future tax obligation.
Once Social Security, pensions, and RMDs overlap, your taxable income could rise considerably. A surviving spouse may also face higher tax rates after moving from a joint return to single filing status.
Minimizing this year’s tax bill is not necessarily the same as minimizing taxes over both spouses’ lifetimes.
Make Use of Your Retirement Tax Window
The years immediately after retirement can offer an important planning opportunity.
Your paycheck has stopped, but Social Security or RMDs may not have started. Depending on your circumstances, your income could temporarily fall into a lower tax bracket.
During this window, deliberately taking IRA withdrawals or completing Roth conversions may make sense. You recognize income today with the goal of reducing larger taxable withdrawals later.
For example, you might use brokerage assets to cover living expenses while converting part of your traditional IRA to a Roth. Alternatively, you might fund some spending directly from your IRA to take advantage of a lower bracket.
The goal is to choose when to recognize income based on your broader retirement plan.
Build a Mix That Fits Each Year
Imagine a retired couple who needs $120,000 annually for living expenses and owns all three account types.
They might begin with Social Security and cash dividends already available for spending. Next, they could sell selected brokerage investments, paying attention to gains and cost basis.
They could then withdraw enough from their IRA to use a targeted tax bracket. If additional taxable income would create an unfavorable consequence, a qualified Roth withdrawal could cover the remaining spending need.
The best mix can change from year to year. A major purchase, market decline, new pension, or change in family circumstances may call for adjustments.
Look Beyond the Income Tax Bracket
Your withdrawal decisions can affect more than your federal income tax rate.
Additional income may increase the taxable portion of Social Security benefits, trigger Medicare income-related surcharges, affect capital-gains rates, or expose investment income to the net investment income tax. State taxes and changes to deductions or credits also matter.
That is why withdrawal planning should be coordinated with tax planning and reviewed annually.
There is no universal “first account” for every retiree. A thoughtful strategy uses your accounts together to fund the retirement you want while managing taxes throughout your lifetime.