When Jim, 62, walked away from his aerospace engineering career last month, he didn’t exactly feel like he was walking into freedom.
He’d spent decades saving—meticulously tracking every contribution, every market wobble, every penny of employer match—but now that he’s finally retired, he’s staring down a new kind of stress: which account does he pull 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 raised two kids, both grown, and their four-bedroom home is fully paid off. No pensions, no rental income, just a carefully built nest egg worth $980,000 split across 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 a taxable brokerage account
They also have $38,000 in a high-yield savings account for emergencies. Their monthly expenses hover around $4,200. Jim is planning to delay Social Security until age 67 to lock in a higher benefit, but until then, the couple has to rely on what they’ve saved.
The problem: withdrawing from the wrong account too early—or in the wrong order—could lead to thousands in unnecessary taxes over time. Jim knows that once he turns 73, required minimum distributions, or RMDs, will force him to pull from his tax-deferred 401(k) whether he wants to or not. That worries him, especially if it pushes him into a higher tax bracket later.
Carla, who took time off to raise their children and only began contributing to a Roth in her 50s, doesn’t have much in retirement savings herself. Jim always figured his plan would be enough for both of them.
Financial planners often promote the “classic” withdrawal order:
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Taxable brokerage accounts
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Tax-deferred accounts like traditional 401(k)s or IRAs
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Tax-free Roth accounts last, to let them grow as long as possible
The idea is to tap into funds with the lowest tax consequence first, preserving the tax-advantaged growth of the others. But that assumes you’re not planning Roth conversions or trying to qualify for health insurance subsidies.
Jim’s in a gray zone. With no Social Security yet and a low current income, his effective tax rate is unusually low. That’s where the Roth conversion crowd chimes in.
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Some advisors argue that early retirement—especially before RMDs or Social Security—can be the perfect time to do 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 has 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 in two years, they’ll need to buy health insurance on 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 per year in premiums.
If Jim relies too heavily on his 401(k) for the next few years, he might unknowingly price himself out of affordable health insurance.
Let’s say Jim pulls $50,000 a year from the brokerage account for now. Because it’s mostly long-term capital gains, he could pay very little in taxes—maybe even zero if his taxable income stays low. This would preserve his Roth and 401(k) balances while avoiding ACA traps.
But that also means selling investments, giving up long-term compounding, and potentially triggering 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 pulled from his 401(k) instead—say, $50,000 this year—that money would be taxed as ordinary income. He’d stay in the 12% federal bracket, but every withdrawal raises his taxable income, making future ACA subsidies harder to qualify for.
Then there’s the Roth IRA, sitting untouched. It’s tax-free. It’s flexible. It’s tempting. But draining it now could 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 trigger a tax hit.
In Jim’s case, there’s no perfect answer. He could prioritize the brokerage account and sprinkle in small Roth conversions from his 401(k) while he’s in a low bracket. He could delay drawing from the Roth until much later. Or he could split his withdrawals across all three to smooth out taxes over time.
It’s not about finding the right account to draw from. It’s about managing the long-term tax impact, avoiding benefit cliffs, and maintaining flexibility in a world full of unknowns.
But Jim’s question isn’t unusual—and he’s not the only retiree looking at a pile of savings and wondering, Now what?
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This article I Just Retired At 62 With $980K Between My 401(k), Roth IRA, And Brokerage Account—Which Do I Tap First So I Don't Get Crushed on Taxes? originally appeared on Benzinga.com
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