Before RMDs Begin, Which Account Should Fund Retirement Spending First?
By George F. Vieth
George Wealth Management
Quick Answer
There is no one account that every retiree should spend from first.
For some people, it may make sense to use money from a taxable account first. For others, taking some money from a traditional IRA before required minimum distributions begin may be worth considering. In some cases, keeping Roth money for later may also make sense.
The better question is not:
“Which account should I spend first?”
It is:
“What are you trying to make possible, and how should your income, taxes, investments, and future needs work together?”
That is a much better place to start.
If you are already thinking about how all of these pieces fit together, our Retirement Planning process is designed around that larger question.
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Retirement Changes the Question
While you are working, money usually comes in through a paycheck.
You pay your bills.
You save some of what is left.
Retirement changes that.
Now the money you saved over many years may need to become your paycheck.
That creates new questions.
Where should the money come from?
How much should you take?
Should you use a taxable account first?
Should you take money from an IRA even if you are not required to yet?
Should you leave Roth money alone for later?
And how might the choice you make this year affect your taxes in future years?
These are not just investment questions.
They are connected financial decisions.
Your Accounts Are Not All Taxed the Same Way
Most retirees have more than one type of account.
You may have:
Cash in the bank
A taxable investment account
A traditional IRA
A 401(k)
A Roth IRA
Social Security
A pension
Real estate
Business interests
Money taken from each type of account can be taxed differently.
That means the easiest account to use may not always be the best one to use.
Sometimes it may make sense to take money from more than one account during the same year.
The goal is not to avoid all taxes.
The goal is to understand your choices and make the decision on purpose.
For more about how retirement withdrawals, Roth decisions, Medicare, charitable giving, and other choices may connect, see our Tax-Aware Planning page.
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Do Not Wait Until RMDs Make the Decision for You
Traditional IRAs and many retirement plans eventually require you to take money out.
These withdrawals are called required minimum distributions, or RMDs.
Before RMDs begin, you may have more control over where your income comes from.
That can create planning opportunities.
For example, you may want to look at whether it makes sense to take some money from an IRA earlier.
You may also want to look at a partial Roth conversion.
A Roth conversion moves money from a traditional retirement account into a Roth account.
That can create taxes today, so it is not right for everyone.
The answer depends on things like:
Your current tax rate
Your expected future tax rate
Other income
Medicare costs
Cash flow
Estate goals
What you want the money to do later
This is also why working with a qualified tax professional can be important.
Taxes Are Only Part of the Decision
Taxes matter.
But they are not the only thing that matters.
Imagine that the stock market drops sharply.
If all of your retirement spending has to come from investments that are down in value, you may be forced to sell at a bad time.
Having enough cash or other easy-to-sell investments can give you more choices.
On the other hand, keeping too much money in cash for too long also has tradeoffs.
A good withdrawal plan should look at more than taxes.
It should consider:
Income needs
Taxes
Investment risk
Cash available
Time horizon
Estate goals
And one more thing:
What would help you feel secure?
A plan may look perfect on paper and still be wrong for you if it keeps you awake at night.
Think More Than One Year Ahead
One of the easiest mistakes to make in retirement is solving only this year's problem.
Suppose you need $80,000 this year.
The first question may be:
“Where should the $80,000 come from?”
But the better question may be:
“If we take the money this way, what could that mean next year, five years from now, or when RMDs begin?”
No one knows exactly what tax laws, markets, or your life will look like years from now.
You do not need a perfect prediction.
You need a plan that gives you choices.
That is why flexibility matters.
Start With What You Are Trying to Make Possible
Before choosing which account to spend first, step back.
Ask:
What am I trying to make possible over the next several years?
Maybe you want to:
Enjoy retirement without worrying about every market move
Travel while you are healthy
Help children or grandchildren
Reduce future tax surprises
Make sure your spouse is okay if something happens to you
Give money to charity
Leave money to your family
Feel comfortable spending the money you worked hard to save
Once you know what you are trying to accomplish, the account decision becomes easier to understand.
Now the question is not simply:
“Should I use my IRA or brokerage account?”
It becomes:
“How should all of my accounts work together to support the life I want?”
That is the broader purpose of our Retirement Planning process.
See How Retirement Planning Works
Retirement Income Is a Coordination Problem
Your investments, taxes, Social Security, retirement accounts, estate plan, and spending needs do not operate by themselves.
One decision can affect another.
That is why it often helps to look at the whole picture.
A financial advisor can help you organize the choices and compare different paths.
A CPA or tax professional can help you understand the tax impact.
An estate attorney may need to be involved when beneficiary or estate decisions matter.
The goal is not for one person to do everything.
The goal is to have the right people working together around the decision you are trying to make.
What Should You Do Next?
If retirement is getting closer, or if you are already retired but RMDs have not started yet, this may be a good time to review where your future retirement income will come from.
Do not start with a product.
Do not start with an account.
Start with this question:
What are you trying to make possible?
Then decide:
What needs attention now?
What can wait?
And who should help you think it through?
If you are not sure where to start, the Planning Assessment Center can help you identify which area may deserve your attention first.
Visit the Planning Assessment Center
This material is for educational purposes only and is not individualized tax or legal advice. Tax and legal decisions should be reviewed with qualified professionals. Investment and planning decisions should be based on your individual situation.