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 runs 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. The math is uglier than most retirees realize.

Sequencing is the whole game

Lembcke’s point 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 born in 1963 and 1964, 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, and that entire amount counts as ordinary income on top of Social Security.

Because they were born after 1959, SECURE 2.0 sets their RMD starting age at 75, not 73. That longer deferral window sounds helpful, but it compounds the problem: twelve more years of tax-deferred growth on an already large IRA means the required withdrawal at 75 can exceed what the couple actually spends, 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 the time RMDs arrive, 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.” They 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. In 2026, those surcharges begin at $109,000 of modified adjusted gross income for single filers and $218,000 for joint filers, with total monthly Part B premiums ranging from $202.90 up to $689.90 depending on income. Income earned at 63 sets your IRMAA bill at 65.

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

The Net Investment Income Tax compounds the problem further. 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 applies here: “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 most of the benefit.

What to do now

Inflation makes the timing more urgent. Headline CPI rose to 4.2% year-over-year in May 2026, a three-year high driven largely by energy prices, while core CPI (excluding food and energy) climbed to 2.9%. IRMAA thresholds and tax brackets adjust annually for inflation, but RMD percentages do not. Rising prices pushing incomes higher against fixed withdrawal math means bracket creep is a real and growing risk for retirees with heavy pre-tax balances.

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 worth solving now.
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 your RMD age (73 if born before 1960, 75 if born in 1960 or later) and one assuming you blend withdrawals plus annual conversions starting now. Compare the projected required withdrawals under each path.
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 collects a much larger share of the portfolio you spent forty years building.

Editor’s note: This article updates the inflation figure from 2.1% to the current 4.2% headline CPI (year-over-year as of May 2026) and adds context on the SECURE 2.0 rule that sets the RMD starting age at 75 for those born in 1960 or later, correcting the hypothetical example accordingly. The 2026 IRMAA income thresholds ($109,000 single / $218,000 joint) have also been added for specificity.

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