Most Retirees Are Making This 401(k) Mistake: Draining Taxable Accounts First

On a recent episode of Thoughtful Money with Adam Taggart, financial planner Julia Lembcke described what she sees across most retiree balance sheets: “What I see most of the time is that the pre-tax accounts, whether they’re 401(k)s or IRAs, self-employment retirement accounts, that they’re the dominating share of the tax type.” Her typical client breakdown is 60-70% in pre-tax accounts, 20% in after-tax, and 10% or less in Roth accounts. In the worst cases, “the pretax is 90% or more of a person’s net worth, and that’s going to create a big issue, especially if you’re maybe a higher spender and especially when RMDs are due.”

The stakes are concrete. Every dollar in a traditional 401(k) or IRA is taxed as ordinary income on withdrawal. Pull too much in a single year and you push yourself into a higher bracket, trigger Medicare IRMAA surcharges, lose the 0% capital gains rate on brokerage assets, and potentially owe the 3.8% Net Investment Income Tax. Lembcke is right, and the math is uglier than most retirees realize.

Sequencing is the whole game

Lembcke’s claim that “the way that they withdraw those funds, the sequence with which they withdraw the funds, has a huge impact on their total lifetime taxes” is arithmetic, plain and simple.

Consider a 62-year-old couple with $2 million split 80/15/5 across traditional IRA, brokerage, and Roth. They need $100,000 a year to live. The conventional rule says drain taxable first, then traditional, then Roth. Following that order, they spend down the brokerage in roughly three years on capital gains taxed at 0% or 15%. Then at 65, they start pulling $100,000 a year from the IRA. That entire amount is ordinary income, on top of Social Security.

By 73, when RMDs kick in under current law, the IRA has compounded back near $2 million. The required withdrawal alone can exceed what they spend, forcing taxable income they do not need. That is the tax time bomb Lembcke describes.

The smarter sequence blends withdrawals. From 62 to 70, the couple pulls $40,000 from the IRA and $60,000 from the brokerage each year. The IRA piece sits inside the 12% bracket. Simultaneously, they convert another $30,000 to $50,000 a year to Roth, filling up the 12% and lower 22% bands. By 73, the traditional IRA balance is materially smaller, RMDs are manageable, and lifetime tax drag drops by six figures for a household this size.

The IRMAA lookback trap

Lembcke flags the trap precisely. “Hidden taxes in retirement” kick in at age 63-65 because Medicare uses a two-year lookback on your tax return to set Part B and Part D premium surcharges. Income earned at 63 sets your IRMAA bill at 65.

That is why she recommends doing “a little bit of Roth converting” before age 63. The window between retirement and 63 is the cleanest conversion runway you will ever have. No wages, no RMDs, no IRMAA penalty for one bad year of high income.

The Net Investment Income Tax compounds the problem. NIIT adds 3.8% on investment income for joint filers above $250,000 of modified adjusted gross income. A single large Roth conversion at 64 can pull capital gains, dividends, and interest into NIIT territory and lift Medicare premiums for two years running.

Lembcke’s honest caveat: “The reality is you don’t have enough cash on the side to do significant conversions” when 90% of assets are pre-tax. You need taxable cash to pay the conversion tax bill, or you erode the benefit.

What to do now

Inflation makes the timing urgent. CPI is running at 2.1% year-over-year, and the Core PCE index has climbed from 125.79 in May 2025 to 129.28 in March 2026. IRMAA and tax brackets are inflation-adjusted, but RMD percentages are not. Frozen withdrawal math against rising prices means bracket creep is real.

1. Pull your most recent statements and calculate your pre-tax share. Add traditional 401(k), traditional IRA, and self-employment retirement accounts. Divide by total investable net worth. If that share exceeds 70%, you have a sequencing problem to solve.
2. Map your IRMAA window. If you are between 59 and 63, every dollar of Roth conversion done now avoids the two-year lookback that determines Medicare surcharges starting at 65.
3. Model two scenarios at SSA.gov and on an RMD calculator. Run one assuming you defer the IRA until 73 and one assuming you blend withdrawals plus annual conversions starting now. Compare projected RMDs at 73.
4. Hold enough taxable cash to pay conversion taxes. Paying the tax from the IRA itself defeats most of the benefit.

As Adam Taggart put it on the podcast: “If you plan your withdrawal sequence well, you end up being able to save on taxes and have more money left over.” The sequence is the strategy. Pick wrong and the IRS gets a much larger share of the portfolio you spent forty years building.