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There’s No One-Size-Fits-All Answer
A common question we hear from retirees is: Which accounts should I use first? While the short answer is, it depends, there are some general strategies that can help you make a more tax-smart decision about your withdrawals in retirement.
Let’s break it down based on your age, income, and account types.
1. In Your Early 60s and Not Claiming Social Security Yet
If you’re in your early 60s and haven’t started claiming Social Security, you may be in a lower tax bracket. That makes it a great time to begin drawing from traditional retirement accounts like IRAs or 401(k)s—before your income rises with required minimum distributions (RMDs) or Social Security benefits.
Why does this matter? Because both IRA withdrawals and Social Security income can push you into a higher tax bracket. If you can withdraw early while rates are lower, it might save you a good bit in taxes over time.
2. In Your 70s and Already Collecting Social Security
Once you’ve started collecting Social Security and RMDs are required, it makes more sense to let your non-retirement (taxable) accounts continue growing. These accounts get favorable tax treatment when passed on—your heirs receive a stepped-up basis, which can eliminate capital gains taxes on inherited assets.
By contrast, IRAs don’t get this step-up. Heirs will owe taxes on the distributions they take from inherited IRAs. That’s a good reason to let taxable assets grow and draw more heavily from retirement accounts during your lifetime.
Bonus Tip: Capital Gains at a 0% Tax Rate
Here’s a little-known tax planning opportunity: if you’re in a low-income year, you can realize long-term capital gains at a 0% federal tax rate—up to $94,050 of taxable income if you’re married filing jointly, or $47,025 if you’re single (as of 2024). That’s a great way to reposition assets or raise cash without a tax hit.
3. Save Roth IRAs for Last
Roth IRAs are almost always the last account you want to draw from. Why?
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They grow tax-free
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Withdrawals are tax-free
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There are no RMDs during your lifetime
They’re a perfect vehicle for long-term growth and a great asset to pass on to heirs. If you have Roth accounts, consider holding your highest-growth investments in them. That’s what we call good tax location—putting the right kinds of investments in the right kinds of accounts.
Final Thoughts
Which account to draw from in retirement depends on your age, income, Social Security status, and overall tax picture. But with a little planning—and the right sequence—you can significantly improve your retirement income strategy and reduce your long-term tax burden.
As always, we recommend reviewing your plan regularly and making decisions based on your unique situation.
