Which accounts to withdraw from first in retirement

Most retirees have money in three kinds of accounts, each taxed differently when you take money out:

• Taxable accounts such as a brokerage account. You pay tax only on the gain when you sell, usually at capital gains rates.
• Traditional (pre-tax) accounts such as a traditional IRA or 401(k). Every dollar withdrawn is taxed as ordinary income.
• Roth accounts. Qualified withdrawals are tax-free.

The order you draw from them can change your lifetime tax bill by tens of thousands of dollars, without changing what you spend.

The conventional order, and its flaw

The traditional rule of thumb is: taxable first, then traditional, then Roth. Spending taxable money first lets the tax-deferred accounts keep growing. Leaving Roth money for last lets it grow tax-free longest.

The flaw is in the middle. A retiree who lives on taxable money for years may report almost no taxable income. Their lowest brackets go unused. Meanwhile, the traditional IRA keeps growing untouched. When required minimum distributions start, they can push income into higher brackets for the rest of life.

The fix is usually to blend: take some traditional money every year, enough to use the low brackets, and fill the rest of your needs from other accounts.

A worked example

Kim and Joel are both 64 and file jointly. They need $80,000 from savings this year. They haven't claimed Social Security and have no pension. Their accounts:

• Taxable brokerage: $400,000, of which a quarter is unrealized gain
• Traditional IRAs: $900,000
• Roth IRAs: $150,000

Here are three ways to raise the $80,000, using 2026 federal rules and the standard deduction of $32,200:

Approach A pays no tax this year, which looks ideal. But it wastes $32,200 of deduction and the whole 10% bracket. The IRAs keep growing toward larger required distributions later.

Approach B uses the low brackets but goes further, into the 12% bracket, while the brokerage money sits idle.

Approach C takes exactly enough from the IRAs to use the deduction and the 10% bracket: $32,200 plus $24,800, or $57,000. The rest comes from the brokerage account. Its $5,750 gain falls in the 0% capital gains range. The result is $2,480 of tax, all at 10%.

Over a decade of early retirement, approach C moves several hundred thousand dollars out of the IRAs at low rates. That lowers required distributions and future taxes. Whether it wins over a lifetime depends on returns, tax law and how long they live. That's why it's worth testing on the full plan.

What else changes the right order

Health insurance before 65

Kim and Joel are 64. If they buy marketplace coverage, their premium subsidy depends on their income. Approach A's income would be about $20,000, below 100% of the poverty line for two people. Below that line there's no premium tax credit, and in states that expanded Medicaid the household is usually steered to Medicaid instead. Approach C's income of $62,750 sits comfortably in the subsidy range. See IRMAA and ACA cliffs.

Early-withdrawal penalties

Withdrawals from traditional accounts before age 59.5 usually carry a 10% penalty on top of income tax. There are exceptions, including:

• Leaving your job in or after the year you turn 55, for withdrawals from that employer's plan (not IRAs).
• Governmental 457(b) plans, which have no early-withdrawal penalty.
• Roth IRA contributions, which you can always take back.

The app avoids penalties by default: before 59.5, it draws from penalty-free sources first and only uses penalized money if nothing else is left.

Required minimum distributions

From your required beginning age, traditional accounts must pay out a minimum each year. Those withdrawals come first, whatever your order. See required minimum distributions.

Social Security taxation

Once benefits start, extra traditional withdrawals can make more of your Social Security taxable. That can make the effective rate on those withdrawals much higher than the bracket suggests. Withdrawing more traditional money before benefits start avoids some of this.

Heirs

Roth accounts pass to heirs tax-free. Traditional accounts pass with a tax bill attached. Taxable accounts usually get a step-up in basis at death, which erases the gain. If leaving money matters to you, the order that minimizes your own taxes may not minimize your family's.

Health savings accounts

An HSA is usually kept for last and spent on medical costs, which are tax-free. See HSAs in retirement.

Approaches the app can model

In your plan's Saving and withdrawal order section, you can choose:

• A fixed order of accounts, such as taxable, then traditional, then Roth.
• Proportional, drawing from each account in proportion to its balance.
• Custom steps with yearly caps per account.
• Fill a bracket, which takes traditional money up to the top of a chosen federal bracket each year, then follows your order for the rest.

The Taxes screen runs several of these on your plan and compares lifetime taxes and what's left after tax.

Frequently asked questions

Is there one right order?

No. It depends on your account balances, income sources, state, health coverage and goals for heirs. The common thread is to use low brackets every year rather than leaving them empty.

Should I withdraw more than I need?

Sometimes. Taking traditional money to fill a low bracket and reinvesting the extra, or converting it to Roth, can lower lifetime taxes. See Roth conversions.

Does the order matter if all my money is in one account type?

Less so. With only traditional accounts, the main choices are how much to withdraw each year and whether to convert some to Roth in low-income years.