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,…
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On a recent episode of Thoughtful Money with Adam Taggart, financial planner Julia Lembcke described a pattern she encounters on nearly every retiree balance sheet she reviews: “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 holds 60% to 70% of savings in pre-tax accounts, roughly 20% in after-tax brokerage assets, and 10% or less in Roth. In the worst cases, she says, “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 real and the math is concrete. Every dollar in a traditional 401(k) or IRA is taxed as ordinary income when withdrawn. Pull too much in a single year and you push yourself into a higher bracket, trigger Medicare IRMAA surcharges, forfeit the 0% capital gains rate available on brokerage assets, and potentially owe the 3.8% Net Investment Income Tax. The combined effect tends to be far uglier than most retirees expect before they file their first retirement tax return.
Sequencing is the whole game
Lembcke’s observation 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. The order of withdrawals shapes every tax bracket hit, every Medicare premium determination, and every dollar that eventually passes to heirs.
Consider a 62-year-old couple born in 1963 and 1964, with $2 million split 80/15/5 across a traditional IRA, a brokerage account, and Roth. They need $100,000 a year to live on. The conventional rule says drain the taxable account first, then the traditional IRA, then Roth. Following that sequence, they spend down the brokerage in roughly three years, paying capital gains taxed at 0% or 15%. At 65, they start pulling $100,000 a year from the IRA, and that entire amount counts as ordinary income stacked on top of Social Security benefits.
Because they were born in 1960 or later, SECURE 2.0 sets their required minimum distribution starting age at 75 rather than 73, which applies to those born between 1951 and 1959. That longer deferral window sounds like a gift, but it compounds the problem. A decade or more of tax-deferred growth on an already large IRA means the required withdrawal at 75 can easily exceed what the couple actually spends, forcing taxable income they do not need. That is the tax time bomb Lembcke describes.
The smarter approach blends withdrawals from the start. From age 62 to 70, the couple pulls $40,000 from the IRA and $60,000 from the brokerage each year, keeping the IRA piece inside the 12% bracket. Simultaneously, they convert $30,000 to $50,000 per year to Roth, filling the 12% band and reaching the lower end of the 22% band. By the time RMDs arrive at 75, the traditional IRA balance is materially smaller, required withdrawals are manageable, and lifetime tax drag drops by six figures for a household this size.
The IRMAA lookback trap
Lembcke flags a specific danger she calls “hidden taxes in retirement.” Medicare uses a two-year lookback on your tax return to set Part B and Part D premium surcharges: your 2026 Medicare premiums are determined by income reported on your 2024 return. That lag creates an especially sharp risk between ages 63 and 65. In 2026, IRMAA surcharges begin at $109,000 of modified adjusted gross income for single filers and $218,000 for joint filers. The standard monthly Part B premium is $202.90, but high-income retirees face total monthly Part B costs ranging from $284.10 to $689.90 across the five IRMAA tiers. The cliff structure is unforgiving: even one dollar over a tier threshold triggers the full surcharge for that level, so income earned at age 63 can produce a Medicare bill at 65 that arrives with no warning.
Retirees who receive an IRMAA determination they believe reflects stale or inaccurate income can file an appeal with the Social Security Administration using Form SSA-44. That form allows them to substitute more recent income data if a qualifying life-changing event occurred. Retirement itself counts as one such qualifying event, meaning a retiree whose 2024 return showed a full year of employment wages can often request that the SSA use a more recent, lower-income year instead. That option is broadly underused and worth knowing about.
This is why Lembcke recommends doing “a little bit of Roth converting” before age 63. The window between retirement and that birthday is the cleanest conversion runway available: no wages, no RMDs, and no IRMAA lookback risk from a full year of elevated income. An additional wrinkle involves the Net Investment Income Tax, which tacks on 3.8% on investment income for joint filers above $250,000 of modified adjusted gross income. A single large Roth conversion at 64 can simultaneously drag capital gains, dividends, and interest into NIIT territory and lift Medicare premiums for two consecutive years.
Lembcke’s honest caveat applies throughout: “The reality is you don’t have enough cash on the side to do significant conversions” when 90% of assets are pre-tax. Taxable cash is what pays the conversion tax bill. Without a sufficient taxable cushion, conversion erodes most of its own benefit before it has a chance to work.
What to do now
The macro backdrop has grown more consequential for retirees managing large pre-tax balances. Headline CPI came in at 3.4% year-over-year in both July and August 2026, with gasoline prices up roughly 27% from a year earlier as Middle East tensions kept energy markets unsettled. Core CPI, which strips out food and energy, eased to 2.4% annually in August, its lowest reading in years, but overall inflation remains well above the Federal Reserve’s 2% target. The FOMC responded at its September 15-16 meeting by raising the benchmark federal funds rate by 25 basis points to a range of 3.75% to 4.00%, a unanimous 12-0 vote and the first rate increase since 2023. The September dot plot showed most officials projecting the year-end 2026 rate between 4.1% and 4.4%, a meaningfully hawkish shift from projections issued just three months earlier.
Why does any of this matter for withdrawal sequencing? Because bracket creep poses a real and growing risk for retirees carrying heavy pre-tax balances. IRMAA thresholds and tax brackets adjust for inflation annually, but RMD percentages do not, so rising nominal account values pressed against fixed withdrawal math still work against this group. Higher interest rates also increase the yield on cash and short-term bonds held in taxable accounts, adding another source of ordinary income on top of IRA distributions and Social Security. That additional income layer can push a household across an IRMAA threshold without any change in spending behavior.
- Pull your most recent statements and calculate your pre-tax share. Add traditional 401(k), traditional IRA, and self-employment retirement accounts, then divide by total investable net worth. If that share exceeds 70%, you have a sequencing problem worth solving now.
- Map your IRMAA window. If you are between 59 and 63, every dollar of Roth conversion done now avoids the two-year lookback that will determine Medicare surcharges starting at 65. A reminder: 2026 IRMAA surcharges are based on your 2024 tax return, not your current income.
- Model two scenarios at SSA.gov and on an RMD calculator. Run one assuming you defer the IRA until your RMD age (73 if born between 1951 and 1959, or 75 if born in 1960 or later) and a second assuming you blend withdrawals plus annual conversions starting now. The projected difference in required withdrawals can be striking.
- Hold enough taxable cash to pay conversion taxes. Paying the tax from the IRA itself defeats most of the benefit and reduces the balance you were trying to protect.
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. Choose wrong and the IRS collects a far larger share of the portfolio you spent four decades building.
Editor’s note: This pass updated the macroeconomic context to reflect the FOMC’s unanimous September 15-16, 2026 decision to raise the federal funds rate by 25 basis points to 3.75%-4.00%, the first rate hike since 2023, and added August 2026 CPI data showing headline inflation at 3.4% year-over-year with core CPI easing to 2.4%. The September dot plot projection of a year-end 2026 rate between 4.1% and 4.4% was also incorporated, along with context on how higher rates generate additional ordinary income in taxable accounts that can trigger IRMAA thresholds.
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I've spent more than 15 years inside enterprise software, working alongside the finance, sales operations, and HR leaders who run the revenue engines at some of the largest tech companies in the country.
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