Which account should I draw from first in retirement?

The common default is taxable brokerage first, then IRA, then Roth. It minimizes this year's tax but can leave a large IRA untouched until required minimum distributions force high income later, raising tax brackets and Medicare premiums. The right order depends on the household's income in the years between retirement and RMDs, and it usually differs from the default. A written income plan sets the order each year rather than following a rule of thumb.

Why does the order of retirement withdrawals matter for taxes?

Taxable brokerage, traditional IRA, and Roth accounts are taxed differently on withdrawal, so the same dollar amount produces three different tax bills. Over a ten-year retirement the order can change lifetime taxes by a meaningful amount, and it also affects Medicare premiums, which are set from income two years earlier. Most retirees are never shown this because their advisor manages the investments, not the withdrawals.

When do required minimum distributions start?

Required minimum distributions from traditional IRAs and 401(k)s begin at age 73 for most people, and at 75 for those born in 1960 or later. Once they begin, the IRS sets the minimum withdrawal each year. The years between the last paycheck and the first RMD are the window in which a retiree still controls their taxable income.

What does a written retirement income plan include?

A written income plan shows which account funds each year's spending and how much comes from each, the taxable income that produces, the effect on Medicare premiums two years later, and how the plan changes next year. Sevey Wealth Advisors, a flat-fee fiduciary firm in Austin, Texas, builds this as a one-page document for each household and updates it annually.

The Paycheck Stops Next Year. Where Does the Money Come From?

Sep 17

Written By Sean Sevey

A couple came to see me last month with a retirement date circled on the calendar: December 31. He said something I hear a lot. "We've done fine saving. What's working for us is jobs with paychecks, and that's about to stop."

They had $4 million and no idea which account to touch first.

That is not a knock on them. Nobody teaches this part. For thirty years the money went in. Nobody explains how it comes out.

The question underneath the question

"Where does the money come from" is really three questions. How much do we need each month? Which account pays it? And what does that choice do to our taxes?

Most people never get asked the third one. It is the one that costs the most.

Your accounts are not interchangeable

A retiree usually has three kinds of money. A taxable brokerage account, where you already paid tax on the way in. A traditional IRA or 401(k), where you did not, and the IRS is waiting. And a Roth, where the tax is done and the growth is yours.

Pull $100,000 from each and you get three different tax bills. Pull from the wrong one for ten years and the difference is not small.

The default, and what it quietly costs

Ask most people, or most advisors, and you'll hear the same order: spend the taxable account first, then the IRA, then the Roth. It sounds prudent. It is the order that keeps the tax bill lowest this year.

It is also the order that lets the IRA grow untouched for a decade. Then required distributions start, at 73 for most people, or 75 if you were born in 1960 or later. Now the IRS sets your withdrawal amount, not you. Income jumps. The tax bracket jumps. Two years later, the Medicare premium jumps, because Medicare looks at your income from two years back.

None of that shows up on this year's statement. It was built in the years you thought you were being careful.

The years that matter most

There is a window between the last paycheck and the first required distribution. For a lot of retirees it's five to ten years. Income is lower than it has been in decades. Tax brackets that were never available before are open.

What you do with that window decides your tax bill for the rest of your life, and your heirs' after that. Most households spend it doing the default.

What a written income plan looks like

It fits on a page. Which account funds this year's spending, and how much from each. What income that produces and where it lands. What it does to your Medicare premium two years out. And a note about next year, because the answer changes as the numbers change.

If you can't find that page in what your current advisor gave you, you have an investment account. You don't have an income plan.

The couple with the December date

We built theirs in two meetings. Not a different portfolio. The same money, drawn in a different order, for a different reason.

They didn't need more savings. They needed someone to ask the third question.

If your paycheck stops next year and nobody has asked it yet, let's talk it through.

Let's talk it through: https://calendly.com/seveywealth/introduction

Sean Sevey