By Brent Matthew
You’ve spent much of your adult life doing what you can to put money toward retirement. If you’re nearing retirement or are already retired, that focus has shifted. Instead of developing tax-efficient strategies for saving, you’re exploring tax-efficient strategies for withdrawing money from retirement accounts.
Some retirees view their 401(k)s, IRAs, and other accounts as being under the “retirement savings” umbrella. As a result, they don’t give any thought to the order in which they are withdrawing money.
This is a mistake. When you carefully plan how you’ll withdraw funds, you can minimize your tax liabilities while giving your accounts more time to grow.
Withdrawing Money in Retirement: The Traditional Order
Many financial advisors recommend that their clients withdraw money from taxable accounts first, tax-deferred accounts second, and tax-free accounts last. Here’s a closer look at why this is (usually) good advice.
First: Taxable Accounts
If you have investments in a brokerage account, it may be wise to withdraw these funds first. As long as you’ve held the investments you sell for at least a year, you’ll likely only incur long-term capital gains tax when withdrawing money. The rate depends on your income, so if you’re currently retired, you could pay as little as 0% in long-term capital gains tax.
When you tap your investment accounts for funds first, you give tax-advantaged retirement accounts like 401(k)s and IRAs more time to grow.
Second: Tax-Deferred Accounts
Many kinds of retirement accounts are tax-deferred. This means you can contribute pre-tax dollars, but withdrawals are taxed as income. Traditional IRAs and 401(k)s are two of the most recognizable tax-deferred accounts.
These accounts grow over time, but when you withdraw funds in retirement, income tax applies to both your original contributions and their earnings.
Having to pay taxes when withdrawing money isn’t ideal. However, because many retirees are in a lower tax bracket than they were while working, you may be enjoying considerable tax savings.
Third: Tax-Free Accounts
Some retirement accounts, like Roth IRAs, are tax-free. This means you contribute post-tax dollars. When withdrawing money, you don’t have to pay income tax on either your contributions or earnings.
The longer you can leave funds in tax-free accounts untouched, the more tax-free growth can accumulate. It’s usually best to save these accounts for last when withdrawing money in retirement.
Is the “Traditional” Order Always the Right One?
Conventional financial wisdom says to withdraw from taxable, tax-deferred, and tax-free accounts in that order. It’s sound advice in many cases, but that doesn’t mean it’s always the best option.
For example, suppose you continue to do some consultancy work in retirement. This year, you made more than expected, and you landed in a higher tax bracket. Withdrawals from 401(k)s and other tax-deferred accounts are taxed at your current income tax rate, so withdrawing money from these accounts means you’ll pay more in taxes.
If you have a Roth IRA or other tax-free account, it may be best to withdraw money from it. When you drop down to your previous tax bracket next year, you can resume withdrawing money from your tax-deferred accounts.
A Serene Retirement Doesn’t Happen by Accident
Many people dream of a peaceful, carefree retirement. That dream is often a realistic one, but it requires strategic planning and commitment to achieve it. At Scottsdale Wealth Advisory, we help people like you build financial futures they can be proud of.
If you want to start planning for retirement or need guidance on withdrawing money while retired, don’t hesitate to contact us to schedule a consultation.
To schedule your complimentary financial coaching session, call (480) 247-9090, email info@SWAFirm.com, or book directly at calendly.com/BrentMatthew.
Frequently Asked Questions About Withdrawing Money in Retirement
What is the best order to withdraw money from retirement accounts?
The general recommendation for withdrawing money in retirement is to start with taxable accounts, then move on to tax-deferred accounts like 401(k)s and IRAs, and finally, tap into tax-free accounts like Roth IRAs. This strategy helps minimize your tax liabilities while allowing retirement funds to grow.
Can withdrawing from a Roth IRA early affect my taxes?
No, withdrawing from a Roth IRA in retirement typically doesn’t affect your taxes because contributions and earnings are tax-free. However, if you withdraw early (before age 59½), you may face penalties and taxes on the earnings portion, unless you meet certain exceptions.
How does my tax bracket affect when to withdraw retirement funds?
Your tax bracket plays a significant role in determining when to withdraw from different retirement accounts. If you find yourself in a higher tax bracket due to extra income, it might be more beneficial to withdraw from tax-free accounts like Roth IRAs first, to avoid paying higher taxes on tax-deferred accounts like 401(k)s or traditional IRAs.
About Brent
Brent Matthew is the founder and CEO of Scottsdale Wealth Advisory, a full-service fiduciary retirement planning firm serving pre-retirees and retirees across Arizona and multiple states. With a strong commitment to always putting clients first, Brent leads the firm in developing comprehensive, tax-efficient financial plans tailored to each family’s unique goals. He is responsible for researching investment, annuity, and life insurance strategies and building smart asset allocations that reflect both long-term growth and risk management.
Brent is driven by a core belief: “The success of this firm will be measured by the success of the families it represents.” That client-first approach has guided his work since the beginning. He is currently enrolled at the College for Financial Planning and is on track to earn his CERTIFIED FINANCIAL PLANNER® designation. He also holds his Series 65 license and Arizona Life and Health Insurance Producers License.
Outside the office, Brent embraces the Arizona outdoors with “lil B” and their two pomskies, Heimo and Kota. Whether he’s hiking, fishing, dirt biking, skiing, golfing, kayaking, or skeet shooting, Brent finds balance and joy in staying active. He’s also a fan of CrossFit, brunching, and cruising the Phoenix canal system on his beach cruiser—usually with classic tunes from the Marshall Tucker Band, Gordon Lightfoot, or Crosby, Stills & Nash playing in the background. To learn more about Brent, connect with him on LinkedIn.
Advisory services are offered by Scottsdale Wealth Advisory, LLC, an Investment Advisor in the State of Arizona. Insurance products and services are offered through Scottsdale Wealth Advisory, LLC. Scottsdale Wealth Advisory, LLC is not affiliated with or endorsed by the Social Security Administration or any government agency, and is not engaged in the practice of law. Be sure to consult with a licensed financial professional to confirm the accuracy of the insurance product you are considering.
