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For many households, the strongest plan is a tax-diversified mix rather than an all-or-nothing choice. The right withdrawal order depends on your current and expected tax brackets, age, liquidity needs, account basis, state tax, beneficiary goals and whether future Roth conversions make sense.
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What each account does for retirement income
Taxable brokerage account
A taxable brokerage account holds investments outside the IRA rules. You can generally add money without an IRA contribution framework, withdraw it whenever you need it and leave the account open without an RMD schedule. That flexibility is why SEC retirement-income educational material uses taxable assets first in its example sequence.
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The trade-off is ongoing taxation under the applicable rules. Interest, dividends and other investment income may be taxable in the year received, while a sale can create a realized capital gain or loss. The tax result depends on the investment, your basis, the holding period and your filing and state circumstances. A withdrawal is not automatically tax-free merely because the money is in a brokerage account; you need to identify which part is your original basis and which part is income or gain.
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Traditional IRA
Traditional IRA contributions may be fully deductible, partly deductible or not deductible, depending on your income, filing status, workplace-plan coverage and other circumstances. IRS Publication 590-A (2025) explains that contribution deductibility varies by account type and individual facts. Contributions and investment earnings generally remain untaxed while inside the IRA until distributed.
Traditional IRA distributions are generally included in ordinary income under the rules described in IRS Publication 590-B (2025). Any nondeductible basis can change the taxable portion, so keep records of after-tax contributions. Traditional IRA owners generally must begin RMDs by April 1 of the year after reaching age 73. The April 1 deadline applies to the first required distribution; later annual RMDs generally use a December 31 deadline under the applicable rules.
Roth IRA
Roth IRA contributions are made with after-tax money, so you do not claim a deduction for the contribution. Investor.gov describes Roth contributions as after tax and says Roth earnings and withdrawals are generally tax free when the distribution is qualified. Internal Revenue Code §408A states that a qualified Roth IRA distribution is not includible in gross income.
Roth rules distinguish contributions from earnings. Taking out your contribution basis is different from taking out earnings, and a nonqualified distribution of earnings can be taxable and may face an additional tax. The exact result depends on the distribution’s qualification, your age, the account’s history and other applicable rules. An original Roth IRA owner has no lifetime RMD requirement, although beneficiaries follow separate distribution rules.
Account comparison at a glance
| Question | Taxable brokerage | Traditional IRA | Roth IRA |
|---|---|---|---|
| Tax when money goes in | Contributions are made with money that has already been taxed; there is no IRA deduction. | Contribution may be fully, partly or not deductible, depending on circumstances. | Contribution is after tax and generally not deductible. |
| Tax while invested | Interest, dividends and realized gains are taxed under applicable rules. | Earnings and gains generally are not taxed until distributed. | Earnings generally accumulate without current tax. |
| Tax on retirement withdrawal | Tax applies to taxable income and realized gains; return of basis is not itself income. | Distributions are generally ordinary income, adjusted for any basis. | Qualified distributions are generally tax free; nonqualified earnings can be taxable and may face an additional tax. |
| Access | Generally available at any time, subject to investment sale, market and tax consequences. | Access is governed by IRA distribution rules; an early distribution can create income tax and possibly an additional tax unless an exception applies. | Access depends on whether the amount is contribution basis or earnings and whether the distribution is qualified. |
| Lifetime RMD for original owner | None. | Generally begins by April 1 of the year after age 73. | None. |
| Investment menu | Depends on the brokerage provider and securities offered. | Investor.gov notes that investors can choose an IRA vendor; the vendor’s menu and fees matter. | Vendor and investment-menu limits depend on the IRA provider. |
| Estate and beneficiary treatment | Depends on the account agreement, assets and applicable estate and tax rules. | Beneficiaries inherit an account with distribution and income-tax rules that can differ from the original owner’s rules. | The original owner has no lifetime RMD, but beneficiaries have separate distribution requirements. |
How taxes work when you draw retirement income
Withdrawals from a taxable brokerage account
A brokerage withdrawal is usually a sale or transfer of investments. Selling shares can realize a gain or loss based on your cost basis. Dividends and interest may already have created taxable income before you sell anything. Because tax is tied to the income or gain, not simply to the amount transferred to your bank, two withdrawals of the same dollar amount can produce different tax bills.
Taxable accounts can therefore be useful for managing the size and timing of income. You might sell investments with little gain in one year, realize a loss in another year or use cash distributions instead of selling. Those choices require records of basis and an understanding of the investments involved; they are not a promise of a particular tax rate.
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Withdrawals from a traditional IRA
Traditional IRA distributions are generally ordinary income rather than capital gains. A large withdrawal can raise the marginal rate applied to other income, affect deductions or credits and interact with state taxes. A distribution that is required as an RMD is still taxable under the same general framework; labeling it an RMD does not make it tax free.
If you made nondeductible contributions, Form 8606 records basis and the taxable percentage is determined under the applicable aggregation rules. Do not assume you can designate only the after-tax dollars as the next withdrawal without considering all of your traditional, SEP and SIMPLE IRA balances that the rules may combine.
Withdrawals from a Roth IRA
Roth treatment depends on the type of dollars distributed. Contributions were already taxed, while earnings receive the special tax treatment only when the distribution is qualified. A nonqualified earnings distribution can create ordinary income and potentially an additional tax. Keep contribution and conversion records, and verify qualification before treating a distribution as tax free.
Which account should you withdraw from first?
The SEC’s starting framework
In a Q&A from its Third Annual Senior Summit, the SEC presented this general sequence: start with the taxable account, then use traditional IRA assets, and save the Roth IRA for last. The logic is straightforward: taxable assets have no RMD trigger, traditional IRA balances can become taxable and eventually require distributions, while Roth assets can remain tax sheltered for the original owner.
This is educational guidance, not a mandatory rule or individualized recommendation. The SEC did not publish a universal withdrawal percentage or a single order that fits every household.
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- Low-income years: Drawing some traditional IRA money before RMD age can fill a lower tax bracket instead of forcing a larger taxable distribution later.
- Large future RMDs: A household with a substantial traditional IRA may prefer planned withdrawals or conversions earlier, even while taxable assets remain available.
- Charitable goals: Giving strategies can change which account is most efficient to use, but the rules depend on age, charity, account type and transaction details.
- Heir objectives: You may preserve Roth assets for heirs who value tax-free treatment, or spend them earlier if your own projected tax rate is lower than your heirs’ rate.
- Market conditions: Selling depressed taxable holdings can lock in losses, while selling an IRA investment does not create a capital-loss deduction. The tax and investment decisions should be evaluated together.
- Liquidity needs: A near-term spending reserve may belong in the account that can fund it without an early-distribution complication or an unwanted taxable sale.
The practical question is not simply which account is first. It is how much to take from each account each year while meeting spending needs, controlling taxable income and preserving flexibility for later years.
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RMDs: what changes at age 73
Traditional IRA timetable
Under IRS Publication 590-B (2025), traditional IRA owners generally begin RMDs at age 73. The first distribution is generally due by April 1 of the year after the year you reach 73. Waiting until that April deadline can mean taking two taxable distributions in the same calendar year: the delayed first RMD and the next year’s RMD due by December 31. That bunching can increase taxable income, so the timing decision should be modeled before the deadline.
Roth IRA for the original owner
An original Roth IRA owner does not have a lifetime RMD requirement. You can leave the account invested rather than withdrawing solely because of age. This does not remove the qualification rules for distributions, and it does not eliminate RMD rules for beneficiaries after the owner’s death.
Taxable accounts
Taxable brokerage accounts have no IRA-style RMD schedule. You still pay tax when investments generate income or when you realize gains, but there is no required annual withdrawal based only on your age.
Should you favor a traditional or Roth IRA?
Compare the tax rate on the contribution with the rate on the withdrawal
A traditional IRA is most attractive when the deduction has substantial value today and you expect to pay a lower marginal rate on withdrawals. A Roth IRA is most attractive when paying tax now is acceptable and you expect the future rate on withdrawals to be similar or higher, or when tax-free flexibility and no lifetime RMDs are especially valuable.
Those are expectations, not guarantees. Future legislation, income, filing status, Social Security and pension income, investment returns, charitable deductions and state residence can all change the result. Use ranges rather than a single forecast and revisit the assumptions when your circumstances change.
Value of tax diversification
Holding taxable, traditional and Roth assets creates multiple sources of retirement cash. You can choose taxable income in one year, ordinary-income IRA distributions in another and qualified Roth money when you need to avoid adding to taxable income. Diversification across tax treatments can be as useful as diversification across investments because it gives you more control over the composition of each year’s income.
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How Roth conversions fit into the plan
A Roth conversion moves money from a traditional IRA into a Roth IRA. The converted amount is generally included in gross income in the conversion year under the applicable rules. A conversion can therefore be useful when your current marginal rate is temporarily low, but it can also push income into a higher bracket or affect other tax calculations.
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- Estimate taxable income before the conversion, including wages, pensions, Social Security, gains and planned IRA distributions.
- Model the conversion amount by bracket rather than converting an arbitrary percentage.
- Decide how the tax will be paid. Using outside cash generally preserves more of the converted amount in the Roth; withholding from the conversion reduces the amount moved and can create additional complications.
- Check state income-tax treatment and whether the conversion affects credits, deductions or other income-based items.
- Record the conversion date and amount, then review the result with a qualified tax professional when the amount is material.
A conversion is not automatically beneficial because Roth withdrawals can be tax free. The conversion tax, investment horizon, expected future rates and need for liquidity all matter.
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Taxable brokerage money is generally the easiest of the three sources to access at any age, although selling investments can create a gain or loss and the market may be down. That makes it useful for an emergency reserve, an early-retirement bridge or a large one-time expense.
IRA access is more rule-bound. Traditional IRA distributions before the applicable retirement age can trigger ordinary income tax and possibly an additional tax unless an exception applies. Roth distributions require you to distinguish contribution basis, converted amounts and earnings, and to test whether the distribution is qualified. Do not treat an IRA as a checking account simply because the balance is visible online.
A practical liquidity plan often keeps near-term spending in cash or lower-volatility holdings, maintains taxable assets for years when IRA income would be costly and reserves Roth assets for years when tax-free income has the greatest value. The exact mix depends on your spending horizon and risk capacity.
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The account label does not tell you what investments are available. A taxable brokerage provider may offer stocks, bonds, funds and other securities, while an IRA provider may have a narrower or broader menu. Investor.gov notes that investors can choose an IRA vendor, so compare the available investments, account costs, service and beneficiary procedures before opening or moving an account.
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Asset location can matter: interest-producing investments often create more current income in taxable accounts, while tax-efficient holdings may create less annual tax. However, taxes should not override diversification, appropriate risk and reasonable costs. A poor investment held in a tax-favored account can still be a poor investment.
State taxes, beneficiaries and estate goals
State-tax differences
Federal treatment is only part of the analysis. States differ in how they tax IRA distributions, Roth income, investment gains, conversions and retirement benefits. Moving to another state can change the result. Check the rules for the state where the income is recognized rather than relying on a general statement that an account is tax free.
Beneficiary planning
Beneficiary status changes the distribution rules for inherited IRAs. The original Roth owner’s exemption from lifetime RMDs does not transfer automatically to heirs. Review beneficiary designations after marriage, divorce, births, deaths and major account changes, and coordinate them with your estate documents.
Traditional IRA balances can create taxable income for beneficiaries, while qualified Roth distributions are generally tax free. The best account to leave is therefore tied to the heir’s tax situation, expected time horizon and need for liquidity, not just to your own withdrawal preference.
A step-by-step decision process
- List every account and its tax character. Separate taxable basis and unrealized gains, deductible and nondeductible traditional IRA amounts, Roth contributions, conversions and earnings.
- Map guaranteed and recurring income. Include wages, pensions, Social Security and other income before deciding how much portfolio income is required.
- Project tax brackets by year. Include the age-73 RMD start date, planned conversions, capital-gain years and possible state moves.
- Set a liquidity reserve. Decide how many months or years of spending must be available without selling a volatile asset or taking an avoidable early IRA distribution.
- Test withdrawal sequences. Compare taxable-first, traditional-first, Roth-first and blended approaches. Measure taxes, account longevity, RMD size and cash available, not just the current year’s bill.
- Choose a conversion policy. Specify when conversions are considered, the bracket you are willing to fill and where the conversion tax will come from.
- Coordinate beneficiaries and charitable intentions. Confirm designations and evaluate whether traditional or Roth assets better match each recipient or goal.
- Review annually. Recheck after changes in income, law, health, markets, family status or residence.
Illustrative situations
| Situation | Likely planning emphasis | Questions to test |
|---|---|---|
| Early retiree with substantial taxable savings and no RMDs yet | Use taxable funds for flexibility while considering measured traditional IRA withdrawals or conversions during low-income years. | How much traditional income fills the desired bracket? Will selling taxable assets create large gains? |
| Retiree near or past age 73 with a large traditional IRA | Schedule RMDs and evaluate whether additional IRA withdrawals reduce later concentration or avoid bunching. | Would delaying the first RMD create two taxable distributions in one year? What is the state-tax effect? |
| Household with modest traditional assets and a long Roth horizon | Preserve Roth flexibility for years when taxable income must be low or for heirs who value qualified tax-free distributions. | Are distributions qualified? Are beneficiary designations current? |
These examples show why the same account order can be sensible for one household and inefficient for another. They are planning patterns, not predictions of a specific tax result.
Quick Recap
Common mistakes and how to correct them
- Following the SEC sequence mechanically: Treat the taxable-first, traditional-next, Roth-last order as a starting framework, then test it against brackets, RMDs and goals.
- Ignoring the first RMD deadline: Mark both the April 1 first-distribution deadline and the December 31 deadline for later years.
- Calling every Roth withdrawal tax free: Separate contribution basis and earnings, and verify qualification.
- Converting without reserving tax cash: Estimate the conversion tax first and decide whether outside funds will pay it.
- Losing basis records: Keep documentation for nondeductible traditional IRA contributions and Roth contributions or conversions.
- Overlooking state rules: Recalculate after a move or a change in state law.
- Choosing an account without checking the provider: Compare investment options, costs, service and beneficiary administration.
- Assuming one year’s tax rate is permanent: Update the plan as income, legislation and family circumstances change.
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