Which Account Should I Spend First in Retirement? The Smart Withdrawal Order Most Retirees Miss

Confessions of a Financial Advisor 

Which Account Should You Spend First in Retirement?

One of the most important decisions you’ll make in retirement is determining which account you should spend first. The order of retirement withdrawals can dramatically impact your lifetime tax bill, Medicare premiums, and how long your money lasts.

Yet most retirees simply draw from whatever account feels easiest without realizing the long-term consequences.

Jeremy and Susan were doing exactly that.

Jeremy and Susan came in for a discovery visit not long ago. When they sat down across from me, I could tell they had already built a comfortable rhythm in retirement.

They had been retired for six years and were busy fulfilling their dream of traveling to all the national parks. They even had one of those scratch-off books — each park revealed as they visited it. They were living the dream.

They had been with a well-known brokerage firm for five years.

What drew them there?

“It was convenient,” Susan said. Their bank accounts and investment accounts were linked — easy, seamless, everything in one place.

But something started to feel off. That’s when they decided to come see me.

As we dug into their finances, I asked a few important questions — ones every retiree should be able to answer confidently:

1. Do you have a written retirement income plan?
   “No,” they replied.
2. Are you 100% certain you’ll never run out of money?
   They shook their heads.
3. What is your thrive number — not your survive number?
   They looked at each other.
   “$9,000,” she said.
   “Honestly,” Jeremy added, “I’d love to have $10,000 a month.”

Their Social Security and pension combined produced around $6,000 per month. To reach their desired $10,000 lifestyle, they needed to withdraw $4,000 per month from their investments.

So I asked the question that changed everything:

“Where is your advisor taking the income from?”

Silence.

The Mistake That Was Quietly Costing Them

Between the two of them, they had:

• A beneficiary IRA
• A taxable brokerage account
• A Roth IRA
• A traditional IRA

They had all the right tools.

But their advisor had been pulling income exclusively from their brokerage account simply because it was convenient.

If you’ve ever sat across from me, you know I’m not great at hiding my facial expressions.

They noticed.

“Should we be taking it from somewhere else?” they asked.

“Absolutely.”

Why Retirement Withdrawal Order Matters

There is a right way and a wrong way to structure your retirement withdrawal strategy. We call it your asset spend-down strategy and it is never one-size-fits-all.

It depends on:

• How your accounts are taxed
• Your age and your spouse’s age
• Required minimum distributions (RMDs)
• Medicare IRMAA thresholds
• Longevity projections
• Roth conversion opportunities

Without a customized plan, you can legally pay far more taxes than necessary — shrinking flexibility and leaving less behind for your spouse or heirs.

Convenience without strategy is how you accidentally give the IRS a raise.

So here’s the retirement withdrawal order I wish Jeremy and Susan’s advisor had followed from day one.

The Ideal Retirement Withdrawal Strategy (In Order)

1. Beneficiary IRA (Inherited IRA)

Definition: A retirement account inherited from someone else.

Why first?

• Mandatory RMDs apply.
• Withdrawals are fully taxable.
• Cannot be converted to a Roth IRA.
• The SECURE Act limits long-term “stretch” options.

If you’re charitably inclined and age 70½ or older, Qualified Charitable Distributions (QCDs) can reduce taxable income.

These accounts are often the least flexible and most tax-heavy — making them a strong first withdrawal candidate.

2. Taxable Brokerage Accounts

Definition: Accounts funded with after-tax dollars.

Examples:

• Checking & savings
• Brokerage accounts
• CDs
• Money markets

Why second?

• You’ve already paid taxes on principal.
• Only interest, dividends, and capital gains are taxable.
• Highly liquid and flexible.

These are often appropriate “income gap fillers” after inherited accounts.

3. Non-Qualified Accounts

Definition: Investments not tied to employer retirement plans.

Examples:

• Non-qualified annuities
• Bank-owned life insurance

These are taxed LIFO (Last In, First Out), meaning gains are taxed before principal.

They can’t be Roth converted, so strategic timing matters.

4. Capital Gains Assets

Definition: Investments subject to long-term capital gains tax.

Examples:

• Rental properties
• Stocks held outside retirement accounts
• Collectibles

Long-term capital gains rates are often lower than ordinary income tax rates.

Timing sales in lower-income years can dramatically reduce tax impact.

5. Qualified Retirement Accounts

Definition: Tax-deferred accounts funded with pre-tax dollars.

Examples:

• Traditional IRA
• 401(k)
• 403(b)
• TSP

Withdrawals are taxed as ordinary income.

RMDs begin at age 73 under current law.

Why not first?

Because drawing too early may eliminate Roth conversion opportunities in lower-tax years. Proper tax planning can reposition these dollars strategically.

6. Tax-Free Accounts

Definition: Accounts that grow and withdraw tax-free.

Examples:

• Roth IRA
• Roth 401(k)
• Health Savings Account (HSA)
• Certain municipal bonds
• Cash-value life insurance

These are your “trump card.”

They provide:

• Tax flexibility
• Emergency income
• Protection against rising tax rates

These are typically the last dollars you want to touch.

The Real Takeaway

Jeremy and Susan had everything they needed — except a strategy.

They had missed Roth conversion opportunities.
They had no QCD plan.
They were draining flexibility without realizing it.

And they’re not alone.

Many retirees assume, “We’ll just draw from what’s easiest.”

But easy isn’t efficient.

And when it comes to retirement income planning, efficiency is what protects your lifestyle.

Let’s Make Sure You’re Spending the Right Dollars First

Retirement isn’t just about how much you’ve saved — it’s about how you use it.

The order you withdraw from your accounts affects:

• Your lifetime tax bill
• Medicare IRMAA surcharges
• Your surviving spouse’s tax bracket
• The legacy you leave behind

At SWAN Capital, we build personalized retirement income plans that coordinate investment strategy, tax planning, Roth conversions, and Medicare considerations all under one roof.

If you don’t know which account you should spend first in retirement, that’s your sign it’s time for a second opinion.

Schedule your complimentary Income Plan Review today and gain clarity, confidence, and control over your retirement.

COVERING OUR TAIL FEATHERS
Welcome to Swan Capital, LLC (“SWAN”), your friendly neighborhood Registered Investment Adviser (“RIA”). Now, while we may have a fancy title, remember that our registration doesn’t guarantee we’re flying high above the rest. This communication hasn’t been blessed or verified by the United States Securities and Exchange Commission (SEC) or any state securities authority. At SWAN, we believe in giving you personalized investment advice as unique as a swan’s graceful glide. We work with clients in their own states, making sure to play by all the regulatory rules or find the right exceptions. But here’s the scoop: all investments come with risks—like a wild swim in the pond—so no investment strategy can promise profits or protect you from the occasional splashdown. Just remember, past performance is like a cozy old story; it might be nice to reminisce about, but it doesn’t promise what’s coming next. 

SWAN Capital, LLC is an independent firm and is not affiliated with, endorsed by, or sponsored by the Federal Employee Retirement System (FERS) or any government agency. 

Thanks for gliding along with us at SWAN! We’re here to help you soar to new financial heights while ensuring you can truly Sleep Well At Night!