Does the Order You Tap Your Retirement Funds Matter? (Hint: Yes.)

You’ve worked hard for decades. You’ve saved diligently. But one thing you can’t retire from? Taxes.

Retirement is your reward, but Uncle Sam still wants his share. That’s why it’s important to have a smart withdrawal strategy that considers how different accounts are taxed.

Over time, taxes can become a costly burden on your retirement. Consider that one survey found that 36% of retirees said that taxes were a larger expense than anticipated.

The good news: there’s a general order of withdrawals that works well for many retirees. But it’s not a one-size-fits-all plan.

So let’s break down the basics… and when it might make sense to go off-script.

Start with taxable brokerage accounts

Taxable accounts (brokerage accounts, joint accounts or bank savings) are generally the least tax-efficient. They generate taxes on interest, dividends and capital gains every year.

So it often makes sense to draw from these accounts first. Primarily, because it gives your tax-advantaged retirement accounts (IRAs, 401(k)s, Roths) more time to grow, untouched by taxes.

But hold on, this isn’t always the best move. (More on that in a minute.)

Next, tap tax-deferred accounts (Traditional IRA, 401(k), 403(b))

These accounts are tax-deferred, meaning you didn’t pay taxes on the money when you contributed, but you will when you take it out. Withdrawals are taxed as ordinary income.

Tapping these accounts second makes sense for many retirees because it gives you time to plan around your income and tax bracket. In early retirement, you may be in a lower tax bracket than you were while working, so withdrawing from these accounts during that window can reduce the overall taxes you pay on the money.

Plus, you have more certainty around current tax rates. That gives you a chance to manage withdrawals more strategically before required minimum distributions (RMDs) kick in at age 73 (or age 75 if you were born after 1960).

Save Roth accounts for last

Roth IRAs and Roth 401(k)s are the crown jewels of retirement accounts. Since you’ve already paid taxes on the funds you’ve contributed, qualified withdrawals are tax-free. And they don’t have RMDs during your lifetime (Roth 401(k)s do until rolled over into a Roth IRA).

For withdrawals to be qualified, account holders must be 59½ or older and have held the account for at least five years.

So, generally the longer you can leave your Roth alone, the better. It can grow tax-free for you or your heirs.

But wait, should you always start with brokerage accounts?

Not necessarily.

While the typical order works for many retirees, your own situation might call for a different strategy. For example:

• Your state may tax income differently, which might make tapping a tax-deferred account first more favorable.
• Depending on your assets, you might be able to stay in a lower tax bracket by spreading withdrawals across accounts.
• You might benefit from doing Roth conversions, which might also be easier earlier on.
• It could make sense to reduce future RMDs by drawing from your IRA or 401(k) earlier.
• You may want to leave a brokerage account to heirs, who receive a step-up in cost basis (which can reduce taxes for them).

To put it simply: starting with your brokerage account isn’t always the most tax-smart move. Sometimes it is more tax-efficient to “blend” your withdrawals from different buckets. It all depends on personal factors, including your location, assets and long-term goals.

The bottom line

Yes, the order in which you tap your retirement funds matters. And there’s a common order of withdrawals in retirement. But that’s just the starting point.

Your taxes, your lifestyle needs, your health, your legacy goals all play a role in shaping the best plan for you.

That’s why working with a financial adviser can be so valuable. At Advance Capital Management, we help you weigh your options and make smart, personalized retirement planning decisions that align with your goals.

Ultimately, retirement isn’t just about having enough money. It’s about knowing how and when to use it.