What Order Should I Start Withdrawing From My Investment Accounts In Retirement, #318
When you’re moving into retirement, you’re most likely to be starting to ask yourself which investment accounts you should start drawing from first. There’s really no universal answer—retirement withdrawal strategies are deeply personal and situation-dependent. But understanding the implications of each account type and the factors that influence withdrawal order can have a massive impact on your tax burden and the longevity of your assets.
You will want to hear this episode if you are interested in...
[00:00] Retirement withdrawal strategy options
[06:37] Roth IRA and taxable accounts
[07:47] Tax implications for investment gains
[14:12] Roth IRA conversion strategy
[16:17] Real-life retirement income strategies
[19:36] Importance of a withdrawal strategy
Understanding the Account Types and Their Tax Impact
The foundation of your strategic withdrawal plan begins with understanding how each investment account is taxed:
1. Pre-tax Retirement Accounts
These include traditional IRAs and 401(k)s, SEP IRAs, and similar plans. Contributions offer a tax deduction, and growth is tax-deferred, but withdrawals are taxed as ordinary income. These accounts are eventually subject to required minimum distributions (RMDs), currently beginning at age 73 or 75, depending on your birth year. Withdrawals here not only increase your reported income but can also impact Medicare premiums and Social Security taxation.
2. Roth Accounts
Roth IRAs and Roth 401(k)s are funded with after-tax contributions. Qualified withdrawals are tax-free and—if the original contributor owns the account, not subject to RMDs in your lifetime. This makes Roth accounts especially valuable for flexible, later-stage withdrawals.
3. Taxable Brokerage Accounts
These are standard investment accounts not designated for retirement. Withdrawals of principal do not create taxable events; only realized capital gains, dividends, and interest are reported for taxes. One major benefit: capital gains rates can be lower than ordinary income rates and may even reach 0% for some filers. Withdrawals can be easy to manage for opportunistic or requirement-driven needs.
Questions to Consider with Personalized Withdrawal Planning
Several personal factors play into the best withdrawal order:
Are you retiring before 65 and in need of Affordable Care Act (ACA) health insurance?
Do you want to minimize future RMDs or leave assets to heirs?
When will you begin Social Security or receive pension income?
What is your preferred tax bracket and desired lifestyle flexibility?
These questions must be revisited regularly, as changes in tax law, health, or legacy wishes can affect your strategy.
Real-World Withdrawal Scenarios
Coordinating Withdrawals for ACA Subsidies
Jonathan retires at 57, pre-Medicare, and must carefully manage his modified adjusted gross income (MAGI) to retain ACA health insurance subsidies. My suggested plan is to combine modest 401(k) withdrawals, reportable dividends, and money market interest to stay below the MAGI threshold. Additional cash needs are met from accounts, like the money market, which don’t affect taxable income. This keeps his subsidy and aligns with income limits, demonstrating the need for multi-account coordination.
Reducing Future RMDs and Leaving a Legacy
Walter and Amy, 62, want to avoid burdening their heirs with high-tax inheritance on pre-tax accounts. Instead of focusing solely on paying the least tax today, they prioritize Roth conversions while Social Security is delayed, taking advantage of lower brackets now to transfer wealth into tax-free vehicles. Over several years, they could convert hundreds of thousands into Roth IRAs, significantly reducing future RMDs while maximizing wealth transfer.
Minimizing Tax on Social Security
Christian, 68, blends Social Security with distributions from non-taxable sources like his money market to avoid triggering federal taxes on his Social Security. Careful planning allows him to either keep Social Security tax-free or, with limited IRA withdrawals, incur only minimal tax—illustrating the cascading tax effects of various withdrawal levels and sources.
The Importance of Ongoing Review and Professional Advice
Your withdrawal strategy is not a “set-and-forget” plan. Tax laws, account balances, and individual goals will change over time. I suggest annual reviews and, ideally, working with a specialized financial advisor to continually adjust the plan for optimal tax efficiency and income sustainability. A thoughtful approach, tailored to your personal circumstances and updated regularly, will help you balance tax efficiency, income needs, and legacy goals.