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 a pattern she encounters on almost 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 Every dollar in a traditional 401(k) or IRA is taxed as ordinary income when withdrawn.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 anticipate 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 beginning. 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. At the same time, 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, depending on where their income falls 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, which allows them to substitute more recent income data if a qualifying life-changing event occurred. Retirement itself is 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 inflation backdrop makes the timing more urgent. Headline CPI rose 4.2% year-over-year in May 2026, its highest reading since April 2023, driven by an energy shock tied to the U.S.-Iran conflict. The energy index alone accounted for over 60% of the monthly increase, with gasoline prices up 40.5% from a year earlier. Core CPI, which excludes food and energy, climbed 2.9% over the same period. The Federal Reserve’s response has been to hold rates steady, but with a sharply more hawkish tone. At its June 17, 2026 meeting, the FOMC voted unanimously to keep the benchmark rate at 3.50% to 3.75%, while its updated dot plot showed the median year-end 2026 rate projection rising to 3.8%, up from 3.4% in March, with nine of eighteen officials now favoring at least one rate hike before year-end. The Fed also raised its 2026 core PCE inflation forecast to 3.3%, up from 2.7% in March, signaling that price pressures are proving more persistent than policymakers had hoped. Professional forecasters surveyed by the Philadelphia Fed project full-year 2026 headline CPI at 3.5% on a fourth-quarter-over-fourth-quarter basis, up sharply from their prior estimate of 2.6%. Consumer one-year inflation expectations climbed to 3.7% in June 2026, the highest reading since September 2023. What is beyond dispute is that 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 incomes pressed against fixed withdrawal math still work against this group.

1. 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.
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 will determine Medicare surcharges starting at 65. A reminder: 2026 IRMAA surcharges are based on your 2024 tax return, not your current income.
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 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.
4. 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 clarified that the Federal Reserve’s June 2026 inflation forecast revision refers to its core PCE projection, raised to 3.3% from 2.7% in March, and added context from the June 2026 dot plot, which shifted the median year-end rate projection to 3.8% with nine of eighteen officials favoring at least one rate hike. The description of the SSA-44 appeal process was expanded to note that retirement itself qualifies as a life-changing event for IRMAA appeal purposes.

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