The conventional rule for spending down retirement assets is simple and wrong. The rule says: spend your taxable brokerage account first, then your traditional IRA, then your Roth. The logic is that you want to keep the tax-advantaged accounts growing as long as possible. On paper, that sounds sensible. In practice, it often produces a large, unnecessary tax bill in the second half of retirement. Here's the problem. While you're emptying your taxable account — which is often lightly taxed — your traditional IRA is compounding without anyone taking distributions from it. By the time Required Mi
Every retirement portfolio can be sorted into three categories, each with a distinct tax character. Understanding what each costs you matters more than the balance in each. Account Type Examples How RMD Required?** Distributions Are Taxed** Taxable Brokerage, Capital gains No savings accounts (0-20%) on gains; interest as ordinary income Tax-Deferred Traditional IRA, Ordinary income Yes — age 73/75 401(k), 403(b) rates on the full amount withdrawn Tax-Free Roth IRA, Roth Generally No — for 401(k) tax-free original owner (qualified distributions) The conventional sequence — taxable first, tax-deferred second, Roth last — preserves the tax-free Roth as long as possible. What it fails to account for is the compounding problem inside the tax-deferred bucket during those years of neglect.
The retirement income valley — the years between when you stop working and when RMDs begin — often represents the lowest-income period in a decade. Social Security may not have started. A pension, if you have one, may be modest. Earned income is gone. The combination creates a window where the effective tax rate on traditional IRA withdrawals is lower than it will ever be again. Drawing down the traditional IRA voluntarily during those years — even without needing the money for spending — captures that lower rate and reduces the balance that will eventually be forced out as RMDs. A retiree who takes $40,000 per year from a traditional IRA from ages 65 to 73 at a 12% effective rate is pre-paying tax that would otherwise be collected at 22% or higher when the RMDs are mandatory.
The research underlying this cluster examined a hypothetical couple with $1.5 million in a traditional IRA, $800,000 in a taxable brokerage account, and $200,000 in a Roth IRA, retiring at 65 with $75,000 in annual spending needs. Sequence A — conventional taxable-first: The couple spends the taxable account entirely in the first 7 years. The traditional IRA compounds, reaching approximately $2.2 million by age 73. The first RMD is roughly $83,000. Combined with $50,000 in Social Security, income spikes past $130,000, triggering the 85% Social Security taxation and the first IRMAA surcharge tier. Tax drag increases each year through the rest of retirement. Sequence B — optimized bracket management: The couple intentionally draws from the traditional IRA each year to fill the 12% bracket, spending what they need and performing Roth conversions with the rest. By 73, the traditional IRA balance is reduced to approximately $1.2 million. The first RMD is roughly $45,000. Combined with Social Security, income stays within the 12% bracket. IRMAA is avoided. The Roth account has grown to $600,000, providing a tax-free buffer for health emergencies or large expenses. The research report behind this article estimates optimized sequencing extends portfolio longevity by 24 years versus the conventional approach for scenarios like this one.
The 'taxable first' rule isn't always wrong. If the traditional IRA balance is small — meaning RMDs will be modest and not push the retiree into significantly higher brackets — the conventional sequence may be appropriate. If Roth conversions were completed extensively before retirement, the tax-deferred balance may already be well-managed. The conventional sequence is also simpler to execute and requires less annual planning. For retirees whose primary concern is not running out of money rather than optimizing tax efficiency, straightforward spending from taxable accounts first is a reasonable default. The case for active bracket management is strongest when the traditional IRA balance is large enough that RMDs will materially affect tax exposure — typically when the traditional IRA exceeds $500,000 to $700,000 for single filers, or $1 million or more for couples, depending on other income sources. **Not sure which sequence fits your account mix? A financial planner or CPA can run the projection across both approaches with your actual balances and income picture.**
You don't have to need the money to take it. Many retirees treat IRA