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There’s a retirement income mistake that’s among the most common and the most expensive we see, and the mechanics matter more than the headline number. It has to do with which accounts you pull from, and in what order.
Meet Frank and Diane. They’re sixty-two and sixty-one, with three million dollars between them, split across a traditional IRA, a Roth IRA, and a taxable brokerage account. On paper, they’re in great shape. But the order in which they withdraw money determines the quality of their retirement income.
The Default Path
Here’s the path that feels the most conservative, and the one most people follow without ever running the numbers against an alternative: spend the taxable account first, deferring and delaying any taxes, then move to the pre-tax account, and finally start using the Roth.
The problem shows up later. When you spend taxable dollars first while your pre-tax IRA keeps growing untouched, you end up setting up a much larger required minimum distribution once RMDs start at age seventy-three. That larger distribution can push you into a higher tax bracket for the rest of retirement, and that’s before considering what happens after one spouse passes away, or the higher Medicare premiums it can trigger through IRMAA.
The Path We Actually Built for Them
Instead, we drew a partial amount from the IRA every year during the lower-income years, before Frank and Diane claimed Social Security and before RMDs began. We paid some tax now, on purpose, while the Roth account kept growing completely untouched and tax-free.
Paying some tax now is the part that feels backward, since the understandable instinct is to avoid taxes today at all costs. But deliberately paying tax at a lower bracket now avoids paying tax at a much higher bracket over the next two decades, and that’s really the whole exercise: minimizing what gets paid across the full retirement rather than in any single year.
What the Difference Can Actually Cost
Modeled over a twenty-year retirement, that sequencing difference worked out to more than a hundred and forty thousand dollars in total taxes saved, assuming tax rates don’t even go up. That’s purely due to the order in which the money came out of the accounts, with the same accounts, balances, and market conditions in both versions. A different order meant $140,000 stayed with Frank and Diane instead of going to the IRS.
When we walked Diane through both versions side by side, she put it simply: “I thought having the money was the hard part. It turns out that knowing what order to spend it was the much harder part.”
Having a plan for how your accounts interact with each other over time is exactly what moves a number like that.
Where to Check Your Own Plan
If you want to see where your own account mix might have a gap like this, the Guide to the Gaps takes about three minutes and gives you a clear picture of where your plan is solid and where it isn’t.
And if you’d like someone to walk you through your results, or if you have any questions at all about your retirement withdrawal sequence, our team would be happy to show you exactly where you stand. Click here to schedule your Great Life Meeting.
* The examples in this article, including Frank and Diane, are hypothetical and for illustrative purposes only. Actual results will vary based on individual circumstances, account balances, tax rates, investment returns, filing status, and other factors specific to each household. This content does not constitute financial, tax, or legal advice.