Learn · Replace · 4 min
Where Should Your Retirement Income Come From?
So if you need $30,000, the account you choose can affect much more than which balance gets smaller.
You need an extra $30,000 this year. Maybe you're buying a car. Maybe you're taking a bigger trip. Maybe your normal income just doesn't cover everything you want to spend.
You have $30,000 available in your brokerage account, your Traditional IRA and your Roth IRA. So which one do you use?
While you're working, that probably isn't a question you think about very often. In retirement, it can matter quite a bit because those three accounts don't create the same tax result.
Your accounts are taxed differently
Suppose you have three places you can get money.
Your brokerage account contains money you've already paid income tax on. Selling investments may create capital gains or losses, but the entire withdrawal generally isn't taxable income.
Your Traditional IRA works differently. Withdrawals are generally taxed as ordinary income, and required minimum distributions eventually determine at least some of what has to come out each year.
Your Roth IRA is different again. Qualified withdrawals generally don't create taxable income, and Roth IRA owners don't have lifetime required minimum distributions.
| Brokerage account | Traditional IRA | Roth IRA | |
|---|---|---|---|
| What the withdrawal does to your taxable income | Selling investments may create capital gains or losses, but the entire withdrawal generally isn't taxable income | Withdrawals are generally taxed as ordinary income | Qualified withdrawals generally don't create taxable income |
| Required minimum distributions | None | Eventually determine at least some of what has to come out each year | None during the owner's lifetime |
As described in the text, under current rules. The result on your own return depends on the rest of it.
Try it on your accountsSo if you need $30,000, the account you choose can affect much more than which balance gets smaller.
Why not just spend the brokerage account first?
That's a common approach, and sometimes it makes perfect sense. You spend taxable money first, let the Traditional IRA continue growing tax-deferred and leave the Roth alone as long as possible.
But suppose you're recently retired and your taxable income is unusually low. You have a large Traditional IRA that may eventually create meaningful required distributions. Would taking some money from that IRA today actually make sense? Maybe.
You're going to pay tax on those dollars eventually. If your tax rate is relatively low today and you expect your taxable income to be higher later, using some IRA money now could be reasonable. On the other hand, if you're already having a high-income year, adding another $30,000 of ordinary income may be exactly what you don't want to do.
That's why I wouldn't make 'brokerage first, IRA second, Roth last' an automatic rule.
That's why I wouldn't make 'brokerage first, IRA second, Roth last' an automatic rule.
Sometimes the answer is more than one account
You also don't have to choose one account. Suppose you need $50,000. Maybe $20,000 comes from your Traditional IRA because there's room in your tax plan for additional ordinary income. Another $25,000 comes from the brokerage account. The last $5,000 comes from cash.
Or maybe the entire $50,000 comes from the brokerage account because you're already having a high-income year. The answer can change next year.
The example in the text. Hypothetical.
That's the part I think gets missed when people talk about a 'withdrawal order.' It sounds like you're supposed to pick Account A, drain it, then move to Account B. Retirement usually isn't that clean.
The tax return isn't the only thing that matters
Taxes matter, but minimizing this year's tax bill isn't the whole goal. A withdrawal can affect how much of your Social Security is taxable. Higher income can affect future Medicare premiums. Capital gains can interact with other income. Leaving a Traditional IRA untouched for years can result in larger required distributions later.
There are also reasons you may intentionally preserve certain accounts. Maybe the Roth gives you flexibility for a large future purchase without creating additional taxable income. Maybe you're planning charitable gifts from an IRA later in retirement. Maybe estate planning changes which assets you'd prefer to leave to your family.
You want to understand what today's withdrawal does to the years that follow.
So the question isn't simply, 'Which account costs me the least tax today?' You want to understand what today's withdrawal does to the years that follow.
Decide where the money comes from before you need it
You don't need to solve the next 25 years of withdrawals today. But I'd want to know how this year works.
- How much will you need beyond Social Security, pensions and other regular income?
- What does your taxable income already look like?
- Are there capital gains to consider?
- Is there room to take some Traditional IRA money at a reasonable tax cost?
- Is there a reason to preserve the Roth?
Then decide where this year's money should come from. Next year, do it again.
That's a lot different from spending one account until it's empty and moving to the next. The goal isn't to find the perfect withdrawal order. It's to understand what each account does to the rest of your plan before you take the money.