Making Your Money Last

Which Accounts to Spend Down First in Retirement? 4 Tips

Strictly following the conventional approach to pulling retirement income could rob people of control over their taxes.

Taken on face value, the conventional wisdom regarding which order to draw down your accounts in retirement is fundamentally flawed. And when followed blindly, it could potentially deduct years from the life of your retirement portfolio.

Most investment advice suggests that retirees should spend down their taxable assets first (meaning stocks, bank accounts, etc.), tax-deferred assets second (401(k)s, traditional IRAs, etc.), and tax-free accounts last (Roth IRAs, etc.).

The underlying theory is that you can prolong your retirement assets by deferring large tax bills as long as possible. While this makes some degree of sense, the flaws become apparent when you think through the actual mechanics.

For example, consider the notion of spending down all other assets completely before touching your Roth IRA. If your only income sources at that point are Social Security and Roth IRA withdrawals, you would likely have negative taxable income, since your Social Security benefits would likely be non-taxable and your personal exemption and standard deduction would still apply. Any strategy that wastes valuable deductions is inefficient.

In addition, people following this advice who exhaust their taxable assets completely often find themselves trapped in a high tax bracket after Social Security benefits and required minimum distributions (RMDs) commence. Once they begin, there is no easy way to prevent these sources of income from filling their tax brackets. If the combined amount is high enough, they might also trigger higher taxes on items such as capital gains and dividends, Social Security benefits, and Medicare Part B and D premiums.

Each account type has its own advantages, and through proper planning, they can work together harmoniously to lower lifetime tax bills. Any strategy that blindly exhausts assets one at a time, rather than trying to properly integrate them, should be viewed as incomplete.

A Better Approach

The optimal strategy for each person is different, and covering all the possibilities could fill a textbook. Having said that, some general principles apply to everyone. To help you get started, here are some of the most powerful tips:

  1. Start with Asset Location. Before deciding which accounts to draw down first, it’s important to make the most of each account type. Asset location refers to the principle of placing asset classes in the right account. For example, consider emphasizing stocks in your taxable accounts, where they receive favorable tax treatment on qualified dividends and long-term capital gains. To keep your asset allocation intact, bonds can be correspondingly emphasized in your IRAs. You can read a detailed explanation of this strategy in a previous column of mine here.

    This principle alone can potentially add years to the longevity of your portfolio by lowering your lifetime tax bills. When this principle is combined with the right drawdown strategies, the results can be even more powerful.

  2. Stay in the 15% Tax Bracket. If your situation allows, consider making efforts to remain in the 15% federal income tax bracket as long as possible. Here are two reasons why:


    • There’s a big jump between the 15% rate and the next bracket (25%).
    • Investors in this bracket can potentially qualify for a 0% federal tax rate on qualified dividends and long-term capital gains.

    The biggest obstacle to remaining in the 15% bracket is RMDs, which can force you into a higher tax bracket if IRA growth is left unchecked. Therefore, some investors might want to consider making IRA distributions in early retirement up to the top of the 15% tax bracket. A similar but potentially more powerful alternative is to convert this same amount into a Roth IRA, assuming you can live off of taxable assets in the meantime (and you can pay the tax bill for the conversion).

  3. Use Your Roth IRA. In our experience, most people never touch their Roth IRAs during their lifetimes. When we ask, they often explain that given its many advantages, they don’t want to squander this account. What’s the point of having a Roth IRA if you’re not going to use it?

    One powerful way to use your Roth IRA is in conjunction with your other tax planning. For example, if you’re looking to sell an appreciated position, covering some of your living expenses through Roth IRA withdrawals instead might allow you to qualify for the aforementioned 0% rate on that gain.

    Another strategy is to tap your Roth IRA during your highest income tax years to avoid reaching an even higher tax bracket. For example, if RMDs push you to the top of the 15% tax bracket, consider covering your remaining expenses from Roth IRA withdrawals, allowing you to avoid the 25% tax rate.

  4. Charitable Contributions. Many retirees tithe or otherwise make regular charitable contributions. Given the special tax treatment, you’ll want to pay particular attention to how you cover this expense.

    If you itemize your deductions, donating appreciated equity positions from your taxable account is generally the most powerful strategy. If you do not itemize and you’re over age 70½, making a Qualified Charitable Distribution (QCD) from a tax-deferred account is the best course of action, because it will allow you to exclude the donation from your income. If the standard deduction is doubled, as presently proposed, many more retirees will likely find the QCD to be an attractive strategy.

What about Changes to Tax Policy?

Although a framework for tax changes has been released, it’s probably too soon to make significant changes to your plans at this point given the unpredictable nature of politics. As developments unfold, however, you’ll want to keep a close eye on the details to assess the implications to your drawdown strategy.

This material has been provided for general informational purposes. We go to great lengths to make sure our information is accurate and useful, but do recommend you consult your tax, legal, or financial advisor regarding your specific circumstances.

About the Author

Michael Yoder, CFP®, CRPS®

Principal, Yoder Wealth Management

Michael Yoder, CFP®, CRPS®, writes about issues affecting retirees and those transitioning into retirement. He is Principal at Yoder Wealth Management (, a Registered Investment Advisor. 2033 N. Main St., Suite 1060, Walnut Creek, CA 94596. 925-691-5600.

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