The retirement withdrawal mistake that can cost thousands

A common and costly retirement mistake is withdrawing from accounts in the wrong order. Pulling from taxable accounts first can keep your income lower in your early retirement years while tax-deferred accounts keep growing. Without a plan, income can spike once required minimum distributions begin, pushing you into higher tax brackets. Coordinating which accounts you tap, and when, can manage taxes across your whole retirement.

Withdrawal order is a decision, even when you do not realize it

Most retirees have money spread across a few different types of accounts: taxable brokerage accounts, tax-deferred accounts like a traditional IRA or 401(k), and sometimes a Roth. When you need income, the order in which you draw from these is not a small detail. It can shape how much you pay in taxes for years to come.

Many people default to leaving their tax-deferred accounts untouched as long as possible because it feels prudent. But that instinct can quietly set up a larger tax bill later, when required minimum distributions force money out whether you need it or not.

How the wrong sequence creates a bigger bill later

Early retirement is often a lower-income stretch. If you lean on taxable accounts during those years, your overall income can stay modest while your tax-deferred balances continue to grow untouched. That sounds fine until you realize those growing balances eventually trigger larger required withdrawals.

Once required minimum distributions begin, income can jump quickly. That can push you into a higher bracket, increase the share of your Social Security that is taxed, and raise your Medicare premiums. The years you spent avoiding tax-deferred withdrawals can end up concentrating the tax hit into your later years.

• Spending taxable accounts early can keep income, and taxes, lower in your first retirement years.
• Leaving tax-deferred accounts to grow unchecked can lead to large required withdrawals later.
• Those larger withdrawals can raise your bracket, your Social Security taxation, and your Medicare costs.
• Filling lower brackets intentionally in early years can smooth taxes across the whole of retirement.

Coordinating the whole picture

The goal is not to avoid taxes in any single year. It is to manage them across all of retirement. Sometimes that means deliberately drawing from a tax-deferred account, or converting a portion to a Roth, during a low-income year so you are not forced to take much more later at a higher rate.

Because every retiree has a different mix of accounts and income, the right withdrawal sequence is personal. This is one area where mapping it out with a fiduciary advisor, ideally well before required distributions begin, can make a meaningful difference over time.

Frequently asked questions

Which accounts should I withdraw from first in retirement?

There is no single right answer for everyone, but spending taxable accounts earlier can keep income lower in your first retirement years while tax-deferred accounts keep growing. The best sequence depends on your income, account mix, and tax bracket, so it is worth planning before required distributions begin.

Why do required minimum distributions raise my taxes?

Required minimum distributions force money out of tax-deferred accounts whether you need it or not. If those balances have grown large, the withdrawals can be sizable, pushing you into a higher bracket and increasing both Social Security taxation and Medicare premiums.

Can I lower lifetime taxes by changing my withdrawal order?

Often, yes. Drawing income intentionally in lower-income years, and sometimes converting to a Roth, can smooth your taxes across retirement rather than concentrating them later. A fiduciary advisor can help you build a sequence that fits your situation.