When Jim, 62, walked away from his career in aerospace engineering last month, he didn’t exactly feel like he was walking into freedom.
He had spent decades saving—carefully tracking every contribution, every market wobble, every employer penny—but now that he’s finally retired, he’s facing a new kind of stress: which account to withdraw from first?
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Jim and his wife, Carla, 60, live in suburban Colorado. Carla works part-time at a local library, bringing in about $18,000 a year, which helps cover health insurance for now. They have raised two children, both grown, and their four-bedroom house is fully paid for. No pensions, no rental income, just a carefully constructed nest egg worth $980,000 divided into three buckets:
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$570,000 in a traditional 401(k).
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$220,000 in a Roth IRA
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$190,000 in taxable brokerage account
They also have $38,000 in a high-yield savings account for emergencies. Their monthly expenses hover around $4,200. Jim plans to delay Social Security until age 67 to lock in a higher benefit, but until then, the couple must rely on what they have saved.
The problem: withdrawing from the wrong account too early—or in the wrong order—can lead to thousands in unnecessary taxes over time. Jim knows that once he turns 73, required minimum distributions, or RMDs, will force him to draw from his tax-deferred 401(k) whether he wants to or not. This worries him, especially if it pushes him into a higher tax bracket later.
Carla, who took time off to raise their children and only started contributing to a Roth in her 50s, doesn’t have much in her retirement savings herself. Jim always figured his plan would be enough for both of them.
Financial planners often promote the “classic” retirement order:
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Taxable brokerage accounts
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Tax-deferred accounts such as 401(k)s or traditional IRAs
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Tax-free Roth accounts last, so we let them grow as long as possible
The idea is to tap funds with the least tax consequence first, preserving the tax-advantaged growth of others. But that assumes you’re not planning Roth conversions or trying to qualify for health insurance subsidies.
Jim is in a gray area. With no Social Security yet and low current income, his effective tax rate is unusually low. That’s where the Roth conversion crowd comes in.
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Some advisers argue that early retirement—especially before RMDs or Social Security—can be the perfect time to make small Roth conversions, pulling money from the 401(k) at low tax rates and converting it into a Roth to avoid higher taxes later.
Financial expert Suze Orman even called not taking advantage of a Roth conversion one of her “biggest money mistakes,” saying she missed a key chance to let her savings grow tax-free.
But that strategy means paying taxes now—and Jim isn’t sure he’s emotionally ready to see his balance drop just to save on future taxes.
If Carla retires within two years, they will need to purchase health insurance in the marketplace. Here’s where things get tricky: any extra income, even from a 401(k) withdrawal, could disqualify them from getting Affordable Care Act subsidies, costing them thousands a year in premiums.
If Jim relies too much on his 401(k) for the next few years, he may unknowingly price himself out of affordable health insurance.
Let’s say Jim withdraws $50,000 a year from the brokerage account for now. Because it’s mostly long-term capital gains, he may pay very little in taxes—perhaps even zero if his taxable income remains low. This preserves his Roth and 401(k) balances while avoiding the ACA pitfalls.
But this also means selling investments, giving up long-term compounds, and potentially causing capital gains. Plus, it’s not a permanent solution—he’ll still need to deal with the 401(k) eventually.
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If Jim withdraws from his 401(k) instead—say, $50,000 this year—that money is taxed as ordinary income. He remains in the federal 12% bracket, but each withdrawal raises his taxable income, making future ACA subsidies more difficult to qualify for.
Then there’s the Roth IRA, sitting untouched. It is tax free. It is flexible. It is tempting. But emptying now can mean giving up one of the most powerful tools for tax-free compounding and inheritance.
Experts often advise retirees to save Roths for last—or at least for unexpected expenses that would otherwise cause a tax hit.
In Jim’s case, there is no perfect answer. He can prioritize the brokerage account and sprinkle in small Roth conversions from his 401(k) while in a low bracket. He can delay drawing from the Roth until much later. Or he could split his retirement into three to ease taxes over time.
It’s not about finding the right account to draw from. It’s about managing the long-term tax impact, avoiding the benefits cliff, and maintaining flexibility in a world full of unknowns.
But Jim’s question is unusual—and he’s not the only retiree looking at a pile of savings and asking, Now what?
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This article I’m Still Retired At 62 With $980K Between My 401(k), Roth IRA, And Brokerage Account—Which To Tap First So I Don’t Burst On Taxes? originally appeared on Benzinga.com
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