The Order You Pull Retirement Money From Changes What You Keep

If your retirement money is split across a taxable brokerage account, a traditional IRA or 401(k), and a Roth IRA, you have a choice most people never think through: which account do you pull from first this year, and how much comes from each. The three accounts might look like one number on your net worth statement, but the IRS treats a withdrawal from each one differently. Sell stock in the brokerage account and you owe capital gains tax on the gain. Pull money from the traditional IRA and the full withdrawal counts as ordinary income. Take a qualified withdrawal from the Roth and, in most cases, you owe nothing on it at all. None of that changes how much spending power the three accounts give you today. It changes how much of that spending power the IRS collects before the rest reaches your checking account.

That difference means the order you draw from these accounts changes how much tax you pay this year, on top of how much you spend. Pull too much from the taxable and traditional buckets in the same year and you can cross into a higher tax bracket, trigger a higher capital-gains rate, or add income you didn't need to add. Get the order right and you can spend the same amount while keeping more of it. This article walks through the pieces that matter: the required withdrawals you can't skip, how withdrawals stack on top of each other inside a bracket, and a starting sequence you can adjust to your own numbers and revisit every year as your income changes.

Required minimum distributions come first, whether you want them or not

Once you reach the age where required minimum distributions (RMDs) apply, typically 73 under current law, the IRS sets a minimum amount you must withdraw from tax-deferred accounts like a traditional IRA or 401(k) each year. That amount is based on your account balance and your life expectancy, and it comes out whether it fits your spending plan or not. Only after the RMD is satisfied does the rest of your sequencing become optional. Everything in the sections below applies to money above and beyond that required amount, whether you spend it, reinvest it in a taxable account, or give some of it away.

Skipping or underpaying an RMD carries a real penalty, so confirm this year's number with your account custodian before you decide anything else about order. A Roth IRA you own has no RMD during your lifetime, which is one reason people leave it for last in the sequence. An inherited Roth or traditional IRA can carry its own required distribution rules, so check those separately if you've inherited an account rather than built it yourself. If you're giving to charity anyway, a qualified charitable distribution sent directly from the IRA to the charity can count toward the RMD without adding to your taxable income, which is worth asking your custodian about before you take the distribution yourself.

For a fuller walkthrough of this age and deadline, read Required Minimum Distribution: Your Turning-73 Checklist.

Stacking withdrawals without stacking your tax bracket

Every dollar you pull from a traditional IRA or 401(k) adds to your taxable income for the year, and each dollar stacks on top of the one before it, starting at the bottom of your tax bracket and working up. A large withdrawal in one year can push your last few thousand dollars of income into the next bracket, even if your income looks modest most years. A taxable brokerage account works a little differently: you only owe tax on the gain, not the full amount withdrawn, and that gain stacks on top of your other income too, which can push you into a higher capital-gains rate. A qualified Roth withdrawal is the exception. Once you're 59 1/2 and the account has been open at least five years, that money is generally tax-free and doesn't add to either stack. That's what makes a Roth account so useful late in the sequence: it gives you a way to cover a bigger expense in a single year without moving your other income into a higher bracket.

That's why the mix matters as much as the total. Two retirees pulling the same $40,000 this year can owe very different amounts in tax depending on how much of it came from the taxable account, how much came from the traditional IRA, and how much came from the Roth. Someone who takes the whole $40,000 from the traditional IRA might cross into a higher bracket and pay tax on all of it at the higher rate for the portion that spills over. Someone who splits it between the taxable account and the Roth might stay well under the line and keep the entire withdrawal taxed at the lower rate, or not taxed at all.

Compare $25,000 against the top of your current tax bracket. Your tax preparer or the IRS tax tables for this filing year can tell you exactly where that line sits for your filing status. If adding this amount pushes you past that line, moving some of the withdrawal to the Roth account instead can keep the rest of your income taxed at the lower rate. Also watch Medicare premiums: crossing certain income thresholds can trigger a Medicare surcharge called IRMAA the following year, on top of any extra income tax, and that surcharge is based on income from two years earlier, so it catches some retirees off guard.

Putting the order to work

A common starting sequence looks like this: cover your near-term spending from the taxable brokerage account first, since only the gain is taxed and it's often taxed at a lower capital-gains rate than ordinary income. Then draw from the traditional IRA up to the top of the tax bracket you're targeting, filling that bracket on purpose instead of by accident. Save the Roth for whatever spending would otherwise push you over that line, or for years when an unplanned expense shows up and you don't want it to affect your taxable income at all. Revisit the split every year, since your income, your bracket, and your spending needs will all shift over time.

Treat this as a place to start, not a rule that fits everyone. A large capital gain, a pension, a part-time job, or a spouse's income can all move where the bracket lines actually sit for your household. A year with unusually high medical expenses or a year you're helping a family member can also change what the right split looks like. Anyone with a more complex mix of income, a business, or rental property should confirm the specifics with a CPA or a fee-only advisor before locking in a sequence for the year. A workable plan you can explain to whoever files your taxes matters more than a perfect formula.

If a large IRA balance and future RMDs are a bigger concern than this year's bill, read Should You Convert to a Roth Before You Retire?. Converting some of a traditional IRA to a Roth ahead of time, and paying the tax on that conversion in a lower-income year, is a related move that changes what your withdrawal order looks like across several future years, beyond this one.

This article explains how withdrawal order affects your taxable income and walks through the mechanics most retirees run into. It isn't individualized tax advice, and it doesn't account for your full return, your state taxes, or any credits and deductions specific to your household, so confirm your specific numbers with a tax professional before you finalize this year's withdrawals.