Should I withdraw from my IRA or brokerage account first in retirement?

Generally, withdraw from taxable brokerage accounts before touching your traditional IRA. Reason: brokerage account gains are taxed at the lower long-term capital gains rate (0-20%), while traditional IRA withdrawals are taxed as ordinary income (10-37%). Additionally, many retirees have significant unrealized gains in brokerage accounts that, at death, receive a step-up in basis — meaning heirs pay zero capital gains tax if you hold taxable assets until death. Traditional IRA assets do NOT get a step-up in basis and are fully taxable to heirs. However, this rule has important exceptions for bracket management and Roth conversion opportunities.

Should I use Roth IRA or traditional IRA first in retirement?

Traditional financial planning says to use traditional IRA before Roth — preserving Roth's tax-free compound growth longer. However, many retirees should actually do the opposite in specific years: deliberately withdraw from or convert traditional IRA funds in years with low income (the 'tax window') to fill lower brackets. This reduces the future RMD burden from traditional accounts and converts assets to tax-free Roth status. The Roth IRA should be the last resort for spending, but not necessarily the last to experience drawdowns — planned conversions are almost always worthwhile.

What is the tax cost of using the wrong withdrawal order?

Vanguard research suggests that optimized withdrawal sequencing can save $50,000-$150,000+ in lifetime taxes for a retiree with $1 million across all account types, depending on the account mix and income profile. The primary drivers of this difference: (1) preserving Roth funds for tax-free growth instead of spending them first; (2) using low-income years for Roth conversions or filling brackets with traditional IRA draws; (3) harvesting capital gains at 0% rates when income is low; (4) avoiding IRMAA surcharges through careful bracket management. The 'wrong' order typically means paying more taxes at higher rates later.

Which Retirement Accounts to Withdraw From First: The Complete Guide

Most retirees have money in three different tax “buckets” — taxable brokerage, traditional IRA/401(k), and Roth accounts. The order you spend from these buckets can save or cost you tens of thousands of dollars over the course of retirement, through bracket management, capital gains rates, and RMD planning.

The Three Tax Buckets

Bucket	Account Types	Tax Character
Taxable	Brokerage, bank savings, CDs	Capital gains on appreciation; dividends/interest as earned; step-up in basis at death
Tax-deferred	Traditional IRA, 401(k), 403(b), SEP, SIMPLE	Every dollar withdrawn taxed as ordinary income; subject to RMDs at 73
Tax-free	Roth IRA, Roth 401(k)	Qualified distributions completely tax-free; no RMDs during owner’s lifetime

The Standard Withdrawal Order

Priority	Account	Why
1st	RMDs (any required minimum distributions)	Mandatory — skip at 25% penalty
2nd	Taxable accounts	Preferential capital gains rates; step-up in basis at death
3rd	Traditional IRA / 401(k) / tax-deferred	Ordinary income tax applies; should be depleted before Roth
4th (last)	Roth IRA	Preserve tax-free growth as long as possible; no RMDs

This sequence minimizes lifetime taxes for most retirees by maximizing years of tax-free Roth growth and using preferential capital gains rates on taxable accounts.

Why Taxable Accounts Go Before Traditional IRA

Dimension	Taxable Account	Traditional IRA
Tax rate on growth	0-20% (LTCG)	10-37% (ordinary income)
Step-up in basis at death	Yes — heirs pay 0 tax on unrealized gains	No — heirs inherit IRA and pay full income tax in 10-year window
Flexibility	Full flexibility	Subject to RMD rules at 73
Dividend/interest	Taxed annually	Deferred until withdrawal

The step-up in basis is one of the most powerful estate planning benefits in the tax code. If you hold a stock bought at $10 and it’s worth $100 at your death, your heirs inherit it at a $100 basis and owe no capital gains tax on the $90 gain. This benefit is lost if you sell the stock during your lifetime to fund expenses. Preserving taxable assets for estate transfer — while using traditional IRA funds for living expenses — can be very valuable.

Why Roth Goes Last

Reason	Explanation
Tax-free compounding	Every dollar left in Roth grows tax-free; the longer it stays, the greater the benefit
No RMDs	Traditional IRA forces distributions at 73; Roth can compound indefinitely
Flexibility for big expenses	Roth is a last-resort fund for large unexpected costs (medical, long-term care)
Estate planning	Heirs receive Roth tax-free (10-year distribution window, but no taxes due)
Low-bracket spending	If you can spend taxable + traditional IRA in the 12-22% bracket, Roth would be wasted at 0% when another account could fill that space at low cost

When to Deviate From the Standard Order

Situation	Deviation	Why
Low-income year (bracket below normal)	Draw extra from traditional IRA or do Roth conversion	Fill bracket at low rate before it’s wasted
MAGI near IRMAA threshold	Switch to Roth to avoid crossing threshold	Traditional IRA draw would spike MAGI into surcharge
Large anticipated expense next year	Pre-fund from taxable or Roth this year at lower income	Avoid spike in a higher-income year
Very large traditional IRA balance	Accelerate traditional IRA spending in early retirement	Prevent massive RMD problem at 73+
Taxable account has large unrealized losses	Use traditional IRA to fund expenses; harvest losses in taxable	Losses offset future gains; traditional draw cost similar to post-loss taxable

The Bracket-Filling Hybrid Approach

Instead of following the standard order rigidly, sophisticated retirees use a bracket-filling hybrid:

Step 1: Project full-year income from all guaranteed sources (SS, pension, part-time work, dividends)
Step 2: Calculate how much traditional IRA / Roth conversion room remains in the 12% or 22% bracket
Step 3: Fill that bracket with traditional IRA withdrawals or conversions — not necessarily spending all of it, but moving it out of future RMD territory
Step 4: Fund remaining spending needs from taxable account (capital gains)
Step 5: Roth IRA never touched unless forced

Example for married couple on $32,000 Social Security, $8,000 dividends:

Income	Amount
SS taxable (85%)	$27,200
Dividends	$8,000
Standard deduction	($29,200)
Taxable income so far	$6,000
Room to top of 22% bracket	~$200,700
Target: convert/withdraw	$70,000 from traditional IRA (filling to IRMAA limit)
Fund living expenses from	Taxable accounts (much of it at 0% LTCG)

Which Account for Large One-Time Expenses

Expense Type	Best Funding Source	Why
Vacations, home projects (discretionary)	Taxable account (LTCG rates)	Low-cost; step-up if not needed
Medical deductible year	Traditional IRA	Medical expenses may be deductible, offsetting traditional withdrawal
Long-term care costs	Roth IRA or LTCI policy	Major expense; use tax-free funds; largest need
Home purchase (assistance for children)	Taxable first, then Roth	Keep traditional IRA for long-term; Roth contributions (not earnings) accessible penalty-free
Emergency fund replenishment	Whatever has lowest current tax impact	Depends on bracket at time of need

Inheritance and Withdrawal Order: Estate Angle

Asset Transferred at Death	Heir Tax Treatment
Taxable brokerage (appreciated)	Step-up in basis: 0% CGT on accumulated gain
Traditional IRA	Ordinary income tax within 10-year distribution window
Roth IRA	Tax-free distributions within 10-year window

Implication: If leaving assets to heirs, the priority changes:

Spend traditional IRA first (heirs would pay full ordinary income tax on it)
Preserve Roth IRA (heirs receive tax-free)
Preserve taxable (appreciated) (heirs receive step-up in basis; pay no CGT)

This is the same as the retiree’s standard order — but reinforced by estate reasoning.

Withdrawal Order Summary Table

Account Type	When to Draw	When to Preserve
Taxable (CG rate)	Default spending account; harvest 0% LTCG gains	When unrealized gains are large and estate step-up is more valuable
Traditional IRA	After taxable; fill higher brackets below IRMAA	In low-income years when Roth conversion is more efficient
Roth IRA	Last resort for spending; for large unexpected expenses	As long as possible for tax-free growth and legacy