Which accounts should I draw from first in retirement?
Short answer:
The conventional answer is taxable accounts first, then pre tax 401(k) and IRA money, then Roth last. It is a reasonable default and it is frequently wrong, because drawing from one account at a time wastes the low bracket years. In practice the better approach is usually blending withdrawals across account types each year to hit a target income number on purpose.
The short version:
- You generally have three buckets: taxable, pre tax, and Roth, and each is taxed differently
- The conventional order defers taxes, which sounds good and often costs more in total
- Pure deferral leaves the 12% bracket unused for years, then forces large required distributions later
- The better framing is not "which account first" but "what taxable income do I want this year, and which combination produces it"
- Before 65 the ACA subsidy cliff usually drives the answer. After 73 or 75, required distributions do
The three buckets, and why the difference matters
Taxable accounts: a brokerage account. You already paid tax on the money going in. When you sell, only the gain is taxed, often at long term capital gains rates, and the return of your own basis is not income at all. This is the most flexible bucket, and the most useful one for controlling reported income.
Pre tax accounts: traditional 401(k) and IRA. You deducted the contribution. Every dollar out is ordinary income. This is where most energy retirees hold most of their money, and it is the bucket with the least flexibility.
Roth accounts: Roth IRA and Roth 401(k). Funded with after tax dollars. Qualified withdrawals are generally not taxable and generally do not count toward the income measures used for ACA subsidies or IRMAA. The most valuable bucket, which is why it is usually the last one you want to spend and the first one people wrongly want to protect at any cost.
Why the conventional order is often wrong
The conventional order says spend taxable first, let the pre tax money grow, and save Roth for last. The logic is that deferral is good.
Here is the problem. A couple who retires at 60 and lives on taxable savings for six years has very little reported income in those years. That sounds great, and they are wasting something. Their 12% bracket sits nearly empty, year after year, and that room cannot be carried forward.
Meanwhile the pre tax balance keeps compounding. At 73 or 75 required distributions begin, sized off a balance that is now much larger, and they arrive whether the couple needs the money or not. Now the same couple is in the 22% or 24% bracket, their Social Security is more heavily taxed, and their Medicare premiums may carry a surcharge.
They deferred successfully, and they paid more.
What to do instead
Stop thinking about order and start thinking about a target.
Each year, decide what taxable income you want to report, based on the binding constraint for your age. Then build that number out of whichever buckets get you there.
Hypothetical illustration:
A couple, both 62, needs $100,000 to live and is on a marketplace health plan. The binding constraint is the ACA subsidy cliff at $84,600 of modified adjusted gross income for a household of two. So they target below that.
They draw $60,000 from the traditional IRA, which is $60,000 of ordinary income. They take $40,000 from the taxable brokerage account, of which perhaps $12,000 is realized gain. Reported income is roughly $72,000, under the cliff, and they still spent $100,000.
Now the same couple at 66, on Medicare, with the subsidy constraint gone. The binding constraint becomes the top of the 12% bracket, roughly $137,250 of gross income for 2027. They still need $100,000 to live. So they draw $100,000 from the IRA and convert another $35,000 to Roth, filling the bracket deliberately, paying 12% on money that would otherwise have come out later at a higher rate.
Same couple, same spending, completely different strategy, because the constraint changed.
Hypothetical illustration only. Not advice, not a projection, and the figures are simplified.
What drives the answer in your case
- Your age, which determines whether the ACA cliff, IRMAA, or required distributions is the live constraint
- The size of your pre tax balance relative to everything else, which determines how punishing future required distributions will be
- Whether you have any Roth or taxable money at all. Some people have no levers, and the honest answer is that the plan is more constrained
- Whether you hold appreciated company stock, which may make an NUA distribution the first decision rather than a later one
- Your filing status, and the likelihood of a transition from joint to single
- Whether you intend to leave money to heirs or to charity, which changes which bucket is worth preserving
What this means if you work in energy:
Most energy retirees we talk to are heavily concentrated in pre tax money, with company stock inside it, and not much in taxable or Roth. That combination is the hardest version of this problem, because the flexibility to control reported income is exactly what they lack.
Two practical consequences. First, if you are still working, building up taxable or Roth savings alongside the 401(k) is worth more than it looks, because it buys you choices later. Second, if you are already retired and everything is pre tax, the plan has to work harder: the NUA decision, the conversion schedule, and the subsidy question are all more tightly constrained, and the order you do them in matters more.
How we handle this at Baskets Capital:
We build the withdrawal sequence year by year rather than setting a rule once. Each year we identify the binding constraint for your age, set a target income, and choose the combination of accounts that hits it. Where company stock is involved, the NUA decision comes first because it is irreversible. Portfolios are custom built with in house models, equities alongside bonds and fixed income, with active trading and investing, and we keep a near term reserve so a bad market does not force a sale at the wrong time.
Common questions:
Should I always spend taxable money first?
It is a reasonable default and it is often not optimal. Spending taxable first keeps reported income low, which helps before 65, but it also wastes low bracket years and grows the pre tax balance that will eventually be forced out.
Should I save my Roth for last?
Usually yes, because it compounds tax free and does not count toward the income measures that drive subsidies and Medicare surcharges. But Roth money is also the best tool for funding a large one time expense without blowing through a threshold, so holding it untouched forever is not always right either.
What about required minimum distributions?
They begin at 73 or 75 depending on your birth year, and they are the deadline the whole strategy is built around. Everything you do before them is an attempt to shrink what they will be.
Does the order change if I have a pension?
Yes, substantially. Guaranteed income fills your lower brackets before you withdraw anything, which leaves less room for conversions and can make the pre Medicare subsidy question harder.
Can I do conversions and withdrawals in the same year?
Yes, and that is often the point. The withdrawal funds your living expenses and the conversion fills whatever bracket room is left over.
Does any of this change because I live in Texas?
The federal mechanics are the same everywhere. What changes is that there is no state tax layer on your withdrawals or conversions, which makes filling the lower federal brackets cheaper here than in most states.