Why a Retiree Might Spend a $900,000 Traditional 401(k) Before Starting Social Security

Retirees who protect every pretax dollar often leave their cheapest tax years unused. Take a sample married couple, both under 65, with a $900,000 traditional 401(k), some cash and taxable savings, and no paychecks. Social Security hasn’t started yet, and they get to decide when it does.

Their instinct is to live off the outside savings and leave the 401(k) alone to grow. That instinct can cost them. The years between the last paycheck and the first benefit check are often the lowest-income years a household will have. Pretax money costs the least to withdraw when taxable income is at its lowest.

A traditional balance carries a tax bill whose size depends on timing, since tax applies only to taxable distributions at whatever rates the household faces in the year the money comes out. The same dollar can be taxed lightly in a calm year or heavily in a busy one.

Your Standard Deduction Already Covers the First Withdrawals

Under 2026 rules, married couples filing jointly get a deduction of $32,200. Say this couple has no other income and withdraws $32,200 of fully taxable 401(k) money. The deduction cancels out that income completely, so the money pays real bills and they owe no federal income tax on it.

The deduction starts over every year and never carries forward. If they pay for a gap year entirely from savings, most of it goes to waste, because a little interest and dividend income is all it has to offset.

Withdrawals above the deduction may still be taxed at fairly low rates. That depends on what else shows up on the return, such as interest, dividends or gains realized in a brokerage account.

Waiting causes a stacking problem. Once benefits start, every 401(k) dollar lands on top of Social Security income. As explained by IRS Publication 915, the agency’s guide to Social Security taxation, that other income helps determine how much of the benefits becomes taxable. Higher income later can also set off Medicare premium surcharges, which are based on tax returns from earlier years. A smaller pretax balance by then means smaller required withdrawals adding onto benefit income.

Spending and Converting Solve Different Problems

A Roth conversion also creates taxable income during the gap, so people often combine the two moves together. They do different jobs.

A withdrawal pays this year’s bills. A conversion moves money into a Roth account, where it remains invested, and Roth IRAs have no required distributions while the owner is alive. But the conversion’s tax bill may need cash from somewhere else, often the same savings that cover living costs.

Cash needs decide which one fits. A couple with modest savings gets more out of spending from the 401(k), because one withdrawal both uses the low-tax room and pays for groceries. A couple whose expenses are already covered can add a conversion to fill whatever low-rate room is left (we sized up this silent window between the last paycheck and the first RMD in a free Roth guide).

Early Drawdowns Need a Plan for Your 80s

Spending from the 401(k) first leaves less there later, but it also preserves outside savings. Before committing, check whether all remaining accounts, alongside Social Security or a pension, can cover spending into your 80s. A smaller tax bill is no victory if the overall plan leaves you short.

Market timing matters too. A sharp drop early in the retirement forces the couple to sell holdings at low prices to pay bills, and overspending makes the damage worse. Either one can wipe out any tax advantage.

Two more checks belong in the plan. If they buy marketplace health insurance before Medicare, larger withdrawals raise the income used to set their premium subsidies. And both spouses need to be past the age when the 10% early-withdrawal penalty applies, or qualify for an exception. Keep cash set aside for surprises like a roof or a medical bill, so one expense doesn’t force a large withdrawal.

Set This Year’s Withdrawal Before December

Each year, pick where the money comes from by looking at your filing and the spending plan together.

1. Project this year’s return now. Add up the interest, dividends and gains you’ve already realized. Then see how much of the $32,200 deduction and the low-rate room above it is still open. Fill it with 401(k) withdrawals before year-end.
2. Let your cash decide between spending and converting. If savings are thin, take the withdrawal for living costs, but if savings are large and expenses are covered, consider converting the unused room and paying the tax from savings.
3. Test the later years. Make sure all remaining savings plus expected benefits can cover spending into your 80s, even if markets are weak.

Social Security can narrow the low-tax window without closing it. But unused deduction room disappears each year, so check what it could save you before leaving the 401(k) untouched.

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