# Which account should I withdraw from first in retirement?

By James Ustby, CFP®, APMA®. Canonical URL: https://jamesustby.com/retire-which-account-to-withdraw-from-first

> Usually taxable accounts first, then traditional IRA and 401(k) money, then Roth last, with one big exception: in the years between retirement and the start of required minimum distributions, deliberately drawing or converting some traditional IRA money at a low tax rate often beats the simple order. The right sequence is a tax decision, not an investment decision.

## Why the order matters

Three accounts, three tax treatments. A taxable brokerage account is taxed only on gains and dividends. A traditional IRA or 401(k) is taxed as ordinary income on every dollar that comes out. A Roth is never taxed again. Pull from them in the wrong order and you can pay tens of thousands more in tax over a retirement, and push yourself into higher Medicare premiums along the way.

## The default order and why it works

Taxable first, because its gains are taxed at lower capital gains rates and some of it is your own money coming back untaxed. Traditional next, because it has to come out eventually and the IRS will force it with required minimum distributions. Roth last, because every year it stays invested it grows tax-free, and it is the best account to leave to heirs.

## The exception that saves the most money

Between the day you retire and the year required distributions begin, your taxable income is often the lowest it will ever be. Those are the years to fill the low tax brackets on purpose with traditional IRA withdrawals or Roth conversions, instead of leaving the brackets empty and then facing a large forced distribution later at a higher rate. Planners call this bracket filling. It is the single most valuable move in most retirement tax plans and almost nobody does it without being shown.

## Sequence risk is the other half

The order of market returns matters as much as the average. A 20 percent loss in year two of retirement, while you are also withdrawing, does damage that a 20 percent loss in year fifteen does not. The defense is to hold the next two to three years of withdrawals somewhere that does not fall with the market, so a bad year never forces you to sell at the bottom. That is the bucket approach, and it is why a retirement portfolio looks different from an accumulation portfolio.

## A worked example

| Item | Amount |
|---|---|
| Retired at 63, married, no pension, Social Security starts at 67 |  |
| Taxable income in the gap years before Social Security | near zero |
| Room in the lowest brackets each year | tens of thousands of dollars |
| Move: withdraw or convert traditional IRA money up to the top of a low bracket each year |  |
| Result: that money is taxed at a low rate now instead of a higher rate later, and future required distributions shrink |  |

The exact bracket thresholds change every year. The decision does not: look at the gap years, measure the empty room in the low brackets, and use it.

## Questions people ask next

### When do required minimum distributions start?

Age 73 for people born 1951 through 1959, and 75 for people born in 1960 or later, under current law. Check the IRS page below for the current rule.

### Should I ever take from the Roth first?

Rarely. The main case is a year when a traditional withdrawal would push you over a threshold that triggers a higher Medicare premium or more tax on Social Security. A small Roth withdrawal can keep you under the line.

### Does this change if I have a pension?

Yes. A pension fills the low brackets for you, which shrinks or removes the bracket-filling opportunity. The default order matters more, and so does keeping taxable money for flexibility.

## Sources

- [IRS: Required minimum distributions](https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs)
- [IRS: Roth IRAs](https://www.irs.gov/retirement-plans/roth-iras)
- [Medicare: Part B premiums and income-related adjustments](https://www.medicare.gov/basics/costs/medicare-costs)

---

Author: James Ustby, CFP®, APMA®, Wealth Advisor, LPL Financial, Durham and Chapel Hill, North Carolina. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. Examples are hypothetical and for illustration only. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA / SIPC. Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP® and CERTIFIED FINANCIAL PLANNER® in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.