The 401(k) Withdrawal Mistake That Could Cost Retirees Thousands
Decades of careful saving can unravel quickly when retirement withdrawals happen in the wrong order, and the consequences reach far beyond your tax bill. The sequence you choose touches Medicare premiums, required distributions, and the total wealth you pass on.
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Many Americans spend decades building their 401(k)s and IRAs, carefully saving for the day they can finally retire. But once the paychecks stop, another important financial decision takes over: Which accounts should you withdraw money from first? Get the sequence wrong, and you could wind up paying more in taxes than necessary.
A common approach is to spend money from taxable brokerage accounts first, leave traditional retirement accounts untouched until later, and save Roth accounts for last. That strategy can make sense in certain situations, but it can also leave retirees with enormous tax-deferred balances, larger required withdrawals, and potentially higher Medicare premiums down the road.
The good news is that retirees often have more flexibility than they realize. From strategically combining withdrawals to considering Roth conversions during lower-income years, these 12 slides explain why the order in which you spend your retirement savings can matter almost as much as how much you’ve saved.
The Mistake: Draining Taxable Accounts First
After retiring, many Americans follow a straightforward plan: spend money from checking, savings, and taxable investment accounts first, leave traditional 401(k)s and IRAs alone, and preserve Roth accounts for later. On the surface, that sounds reasonable. After all, why withdraw money from an account that generates taxable income when you have savings available elsewhere?
The trouble is that preserving traditional retirement accounts for too long can create substantial tax obligations later. Those accounts continue growing tax-deferred, but the money generally becomes taxable when withdrawn. Depending on your income, filing status, and other circumstances, combining different types of withdrawals might produce a better result than exhausting one account before touching another.
Why a Large 401(k) Can Become a Tax Problem
Having $1 million or more in a traditional 401(k) might seem like an ideal retirement scenario. However, there’s an important distinction between the account’s balance and the amount available after taxes. Traditional retirement accounts generally contain contributions and investment earnings that have not yet been subjected to income tax, meaning the government will eventually collect its share when taxable distributions occur.
Consider a retiree with $1.5 million in traditional retirement accounts and another $200,000 in taxable investments. If the taxable money is spent first, the traditional balance could continue increasing while the retiree has fewer alternative sources of cash. Future withdrawals might then become substantially larger, increasing taxable income during retirement. That doesn’t automatically make a large 401(k) bad, but it does make withdrawal planning important.
The Three Retirement Accounts Are Taxed Differently
Most retirement withdrawal strategies involve three broad categories of savings. Traditional 401(k)s and IRAs generally produce ordinary taxable income when money is withdrawn. Taxable brokerage accounts work differently: selling investments may generate capital gains, with the tax depending partly on how long the investments were held and how much profit was realized. Roth accounts offer another alternative because qualifying withdrawals are generally free of federal income tax.
These differences create opportunities to manage annual taxable income. For example, a retiree might combine a traditional IRA withdrawal with money from a brokerage account rather than relying entirely on one source. However, brokerage sales can also generate taxable gains, and Roth withdrawals must satisfy applicable requirements to qualify for tax-free treatment. Understanding the tax treatment of each account is the starting point for a more effective retirement withdrawal strategy.
Required Minimum Distributions Can Change Everything
Traditional retirement accounts generally cannot remain untouched indefinitely. Federal rules require owners to begin taking required minimum distributions, or RMDs, after reaching an applicable age. For people born between 1951 and 1959, that age is generally 73. For those born in 1960 or later, it increases to 75. These rules apply to traditional IRAs and many employer-sponsored retirement accounts, although some workplace plans have exceptions for employees who are still working.
The required amount is generally calculated using the previous year’s December 31 account balance and an IRS life-expectancy factor. A retiree who has allowed a substantial traditional IRA to grow for years could eventually face mandatory taxable withdrawals larger than the amount needed for everyday expenses. Even if the money is reinvested afterward, the distribution can still create a tax obligation in the year it occurs.
Waiting Until Age 75 Isn’t Always an Advantage
For Americans born in 1960 or later, the required minimum distribution age of 75 provides additional years before mandatory withdrawals begin. That extended window can be valuable because investments have more time to grow tax-deferred. But there’s another side to the equation: a larger account balance can mean larger required withdrawals once distributions begin.
Imagine a traditional IRA containing $1 million at age 65. At an illustrative annual growth rate of 5%, with no withdrawals, the account would reach approximately $1.63 million ten years later. The actual result would depend on investment performance, fees, and account activity. While that growth is beneficial, it can also increase future RMDs. Retirees should consider whether gradually taking distributions earlier could help manage taxable income across multiple years.
A Roth Conversion May Help Reduce Future Taxes
A Roth conversion allows an investor to move money from a traditional retirement account into a Roth IRA. The converted amount is generally included in taxable income for that year to the extent it has not previously been taxed. In return, future qualifying withdrawals from the Roth IRA can be tax-free, and Roth IRA owners are not required to take minimum distributions during their lifetimes.
The potential advantage comes from choosing when to recognize taxable income. Someone who retires before collecting Social Security or beginning RMDs may have years when their income is lower than it was during their career. Converting a portion of traditional retirement savings during those years could be useful. However, conversions are not automatically beneficial, and large conversions can trigger higher tax rates, Medicare premium surcharges, or other unintended consequences.
The Medicare Tax Trap Retirees Often Overlook
Income taxes aren’t the only financial consideration when deciding where retirement income should come from. Medicare uses income-related monthly adjustment amounts, known as IRMAA, to charge higher Part B and Part D premiums to beneficiaries whose income exceeds certain thresholds. In 2026, the first surcharge begins when modified adjusted gross income exceeds $109,000 for individual filers or $218,000 for married couples filing jointly.
The standard Medicare Part B premium for 2026 is $202.90 per month, but higher-income beneficiaries can pay as much as $689.90 monthly for Part B alone. Additional Part D surcharges may also apply. A substantial traditional IRA withdrawal or Roth conversion can increase the income used for these calculations. That means a retirement decision made for tax purposes could also affect healthcare costs, making the timing of withdrawals particularly important.
Why Your Income at Age 63 Can Matter at 65
One of Medicare’s more surprising rules involves the timing of its income calculations. The Social Security Administration generally uses tax information from two years earlier when determining income-related Medicare surcharges. For example, 2026 Medicare premiums are generally based on income reported on a beneficiary’s 2024 federal income tax return. That creates a potential complication for people making substantial financial changes shortly before Medicare eligibility.
A large Roth conversion at age 63 could increase the income used to calculate Medicare premiums at age 65, assuming the usual two-year lookback applies. That doesn’t mean Roth conversions must stop at age 63. Rather, retirees should evaluate the immediate tax cost and any future Medicare premium effects together. Spreading conversions across multiple years can sometimes help avoid unnecessary income spikes, although the best timing depends on individual circumstances.
Retirement Can Qualify You for Medicare Premium Relief
There’s some good news for retirees surprised by higher Medicare premiums. If your income has fallen because you stopped working or reduced your working hours, you may qualify to have your income-related surcharge reconsidered. The Social Security Administration recognizes certain life-changing events, including work stoppage, work reduction, divorce, and the death of a spouse, when evaluating requests for a new income determination.
Form SSA-44 allows eligible beneficiaries to request that Social Security use more recent income information when calculating IRMAA. For example, someone whose earlier tax return reflected a full year of employment income may be able to request a lower surcharge after retiring. Approval depends on the circumstances and supporting documentation. An ordinary investment gain or voluntary Roth conversion, by itself, generally isn’t a qualifying life-changing event.
Blending Withdrawals Could Be a Better Strategy
Rather than spending down one account completely, some retirees may benefit from taking money from multiple sources in the same year. Consider a household that needs $100,000 to cover annual expenses. Instead of withdrawing the entire amount from a traditional IRA, it might draw $40,000 from that account and use $60,000 from taxable savings or investments. The tax results would depend on the household’s other income, investment gains, deductions, and filing status.
This approach can provide more control over annual taxable income. Traditional IRA withdrawals generally count as ordinary income, while money drawn from a brokerage account may include a combination of original investment principal and taxable capital gains. In some circumstances, qualified Roth withdrawals can also help meet spending needs without increasing taxable income. The objective isn’t necessarily to minimize this year’s tax bill, but to manage taxes over the course of retirement.
Roth Conversions Can Create Unexpected Tax Bills
Moving money into a Roth IRA can offer long-term benefits, but the conversion itself may come with a significant tax bill. For 2026, the 22% federal income tax bracket begins above $100,800 in taxable income for married couples filing jointly, while the standard deduction for joint filers is $32,200. A conversion that appears manageable in isolation could push part of a household’s total income into a higher tax bracket once other income sources are included.
Conversions can also indirectly affect the 3.8% Net Investment Income Tax, which generally applies to certain investment income when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly. Although the conversion itself is not considered net investment income, it can raise total income enough to expose investment earnings to that additional tax. Having sufficient money outside the retirement account to pay conversion taxes can help preserve the converted balance, but the decision still requires careful calculations.
Review Your Withdrawal Strategy Before It’s Too Late
The best retirement withdrawal strategy depends on more than the balances in your accounts. Your age, expected Social Security benefits, tax filing status, spending needs, investment returns, and potential Medicare surcharges all influence the decision. Someone with modest traditional IRA savings might have little reason to change a taxable-first approach, while a retiree with millions in tax-deferred accounts could face a very different set of challenges.
Start by reviewing how much of your retirement savings sits in traditional accounts, taxable investments, and Roth accounts. Then compare several withdrawal scenarios over the years ahead, including the possible effects of required minimum distributions and Roth conversions. A qualified financial planner or tax professional can help evaluate the trade-offs. The goal isn’t to avoid paying taxes entirely, but to make thoughtful decisions about when those taxes are paid and how much money remains available throughout retirement.
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