The Best Time to Start a Financial Plan is Now
by Tricia Bush, CPA, CFP®, Owner, AAA Advisory LLC
Question of the Month
Which Assets Should You Use First Once You Retire?
Great question.
When you retire, you flip the switch—from decades of saving for retirement to finally drawing from your nest egg. That shift can feel emotional and overwhelming. After all, most people have been in a saving mindset for 40 or 50 years.
And it’s not just about drawing down money. You also need to decide which accounts to pull from—and when. That decision can have a big impact on how long your money lasts and how much you pay in taxes over your lifetime.
Let’s start by looking at the three main types of accounts most retirees have:
The Three Retirement Asset Buckets
1. Pre-Tax Retirement Accounts
This includes traditional 401(k)s, 403(b)s, TSPs (for government workers), SEP IRAs, and traditional IRAs. These accounts were funded with pre-tax dollars—you got a tax deduction when you contributed, and now you owe taxes when you withdraw.
2. Roth Accounts
Most commonly Roth IRAs, though more employer 401(k) plans now offer Roth options. These accounts were funded with after-tax dollars, so no tax deduction when you contribute, but qualified withdrawals are tax-free.
3. Taxable Accounts
These are your non-retirement savings—brokerage accounts, savings accounts, CDs, or even just a healthy cash cushion. Investment earnings here are subject to annual taxes.
The Typical Withdrawal Order
The default strategy for many retirees is to withdraw in this order: Taxable → Pre-Tax → Roth.
Why? Because taxable accounts generate taxes every year you hold them—dividends, interest, and capital gains. This is often called the “tax drag” or “tax burn.” By using these first, you slow the erosion of your overall portfolio by minimizing unnecessary annual taxes.
Meanwhile, pre-tax and Roth accounts are tax-sheltered—they’re generally growing tax-free until you touch them. The longer those accounts can grow undisturbed, the better.
Starting with taxable assets can also create low-tax years early in retirement, which opens the door for tax planning opportunities like Roth conversions.
Why the Typical Order Makes Sense
By pulling first from your taxable account, you allow your pre-tax and Roth savings to continue growing, untouched and sheltered from taxes. And by using the pre-tax accounts before your Roth, it allows you to reduce future required minimum distributions.
But let’s say you instead started pulling from your Roth account first. That money would come out tax-free—great, right? The catch is: You’ve now burned through your most tax-efficient resource. Later, you’ll be left with only taxable sources (like pre-tax accounts), and you may be forced into higher tax brackets when required minimum distributions kick in at age 73 or beyond.
What Are Required Minimum Distributions (RMDs)?
Once you reach age 73 (or 75 if you were born in 1960 or later), the IRS requires you to begin taking annual withdrawals—called Required Minimum Distributions—from your pre-tax retirement accounts, whether you need the money or not.
These withdrawals are fully taxable as ordinary income and are calculated based on your account balance and life expectancy. And they increase each year, which can snowball into larger and larger taxable distributions as you age.
Here’s Why That Matters
If you’ve allowed your pre-tax accounts to grow untouched for too long, you might find yourself with a very large balance at age 73. That means very large RMDs, which could:
Push you into a higher tax bracket.
Increase your Medicare premiums (IRMAA).
Reduce the amount of Social Security that’s tax-free.
Trigger the 3.8% Medicare surtax on investment income.
In other words, delaying taxes too long can lead to a higher lifetime tax bill.
When Might You Change Course?
Life and taxes rarely follow a straight line. Here are some common reasons to deviate from the standard order.
Low-Income Years Early in
Retirement
You might intentionally withdraw from pre-tax accounts earlier than required to fill up lower tax brackets and reduce future tax bills. If you wait too long, large balances in pre-tax accounts can result in high RMDs later on—which may bump you into a higher tax bracket in your 70s and beyond.
Strategic Roth Conversions
Instead of withdrawing and spending pre-tax funds, you can convert them to Roth IRAs in low-income years. You’ll pay tax now (on your terms), but future growth is tax-free, and there are no RMDs from Roth IRAs during your lifetime.
High-Income or High-Tax Years
Suppose you sell a rental property, receive a lump-sum pension, or realize a large capital gain. In those cases, you may want to withdraw from a Roth account instead of taxable or pre-tax accounts to avoid pushing yourself into a higher tax bracket or triggering Medicare surcharges (IRMAA).
Your Plan Should Fit You
It’s important to remember: there’s no one-size-fits-all retirement drawdown plan.
While tax efficiency matters, your financial plan should reflect your goals, health, and values—not just the math. The best strategy is one that provides both financial stability and peace of mind. In other words, it’s better to have a solid, flexible plan than to chase perfection and end up doing nothing.
