Retirement income does not have to come from one account at a time. The best source can change from year to year as your spending, investments, and tax situation change.
Is there a standard order for retirement withdrawals?
No universal withdrawal order works for everyone. A common starting idea is to spend taxable money first, then traditional retirement money, and save Roth money for last. That may work, but treating it as a fixed rule can create a larger tax bill over time.
Each account affects taxes differently. The real question is not only which account comes first. It is how much to take from each account this year.
| Account | What usually creates tax | Why you might use it now | Why you might preserve it |
|---|---|---|---|
| Taxable brokerage | Gains when investments are sold, plus taxable interest and dividends | Selling may create little gain when the investment has a high tax cost | Keeping an investment may defer a gain and preserve your portfolio mix |
| Traditional IRA or 401(k) | Previously untaxed withdrawals are generally ordinary income | A low-income year may offer room to withdraw at a lower rate | A large withdrawal can raise taxable income |
| Roth IRA or Roth 401(k) | Qualified distributions are generally tax-free | It can fund spending without adding taxable income | More time may allow tax-free growth to continue |
How are taxable account withdrawals taxed?
A taxable account is taxed based on what you sell, not simply on the cash you transfer to your bank. Your cost basis is generally what you paid for an investment, adjusted for certain later events. When you sell, the difference between the sale price and that basis may be a capital gain or loss.
This means a $20,000 sale does not always create $20,000 of taxable income. If the investment cost $17,000, the gain is generally $3,000. The rate can depend on how long you held it and the rest of your income.
A taxable withdrawal may fit when:
- The investment has little or no gain.
- You already planned to reduce that holding.
- Selling will not create an unwanted tax result.
When can traditional retirement withdrawals make sense first?
Traditional withdrawals can make sense when your current ordinary income tax rate is relatively low. Money that went into a traditional IRA or 401(k) before tax is generally taxed as ordinary income when withdrawn. After-tax amounts, if any, can change the calculation.
Using some traditional money during a low-income year may be better than automatically waiting. But the amount matters. One large withdrawal may push part of your income into a higher bracket, while a smaller withdrawal may use available room at a lower rate.
Traditional money may fit when:
- Your taxable income is lower than usual.
- You can take only what fits your planned tax range.
- Selling taxable investments would create a large gain.
When should Roth money fund retirement spending?
Roth money can help when you want cash without increasing taxable income. A qualified Roth distribution is generally tax-free. Roth rules differ by account and by the type of money withdrawn, so confirm that the distribution qualifies.
Saving Roth money for later can be valuable because future qualified growth may remain tax-free. Still, “Roth last” is not an absolute rule. A Roth withdrawal may help when extra taxable income would be costly.
How can taxes change the answer?
Taxes can make two equal withdrawals produce very different results. Suppose Elena withdraws $40,000 and, for this simple example, her traditional withdrawal is taxed at 12% and her long-term capital gain is taxed at 15%.
Taking all $40,000 from a traditional account would create about $4,800 of federal income tax. Selling $40,000 from a taxable investment with a $30,000 basis would create a $10,000 gain and about $1,500 of federal tax. A qualified $40,000 Roth distribution would create no federal income tax.
That does not make Roth the automatic winner. Elena may want to preserve Roth assets, or use part of her low ordinary tax bracket now. A mix of accounts can balance today’s tax bill with future flexibility. State tax and the rest of the return can change the result.
The bottom line
There is no universal first account for retirement withdrawals. Compare the tax cost of taxable sales, traditional withdrawals, and qualified Roth distributions each year, then build that deliberate mix into the retirement income plan.
Santafino’s fee-only fiduciary wealth management firm and CPA firm coordinate retirement income planning with tax reporting. That helps turn account withdrawals into one yearly plan instead of three separate decisions.
FAQ
Should I always spend my taxable account first in retirement?
No. Starting with taxable money may let retirement accounts keep growing, but it can also waste a chance to take traditional withdrawals at a low tax rate. The right choice depends on your income and tax picture that year.
Are withdrawals from a taxable brokerage account tax-free?
Not necessarily. Taking out your original investment is not income, but selling investments may create taxable capital gains. Interest and dividends may also be taxable.
Are Roth withdrawals always tax-free?
No. Qualified Roth distributions are generally tax-free, but a withdrawal that does not meet the rules may include taxable earnings. Check the account type, your age, and the five-year rule before withdrawing.
