In personal finance, we often hear advice like “Save 15% of your income,” “Build an emergency fund,” and “Avoid credit card debt.” However, these common principles do not apply to the actual process of withdrawing money from your retirement accounts. Most of the stuff people read about is how to save money, but there comes a time when you need to withdraw the funds.
The withdrawal sequence used for withdrawing your money is equally as important. Here are which accounts to tap into and when. However, it’s important to note that there are exceptions to these rules that should be considered.
#1 Cash:
If you already have an emergency fund equivalent to six months of expenses, cash should be your initial source of income in retirement. Let’s say your monthly expenses amount to $10,000, and you have $100,000 in the bank. In this case, you should withdraw the first $40,000 from your cash reserves or equivalents.
The primary reasons for prioritizing cash withdrawals are growth and taxes. Cash tends to grow at a slower pace compared to other investments over extended periods. To allow your riskier investments, which often have higher growth potential, sufficient time to grow, it’s advisable to tap into your cash reserves first.
Drawing income from cash will also help keep your taxes low during the early retirement years. This lower tax rate can enable you to transfer funds from a traditional IRA or any pre-tax account into a Roth IRA at a potentially more favorable rate than you might face.
#2 Taxable accounts:
Once you have depleted your emergency fund, it’s time to tap into your taxable investments, including individual, joint, and revocable trust accounts. Similar to cash withdrawals, this choice is influenced by tax considerations. If you hold these investments for over a year, your withdrawals will likely be taxed at more favorable long-term capital gains rates. Additionally, since these accounts are not tax-deferred like retirement accounts, they generally grow slower.
#3 Social Security:
This step requires careful consideration. After depleting your taxable accounts, it doesn’t automatically mean you should immediately start receiving Social Security benefits. Several factors, such as life expectancy, tax implications, and legacy planning, come into play. Social Security retirement benefits begin at age 62 and reach their maximum amount when the recipient turns 70. The longer you delay claiming, the higher your income will likely be. Hence, if maximizing income is your goal, waiting longer is generally beneficial.
Related article: Are You Leaving Money on the Table? Discover the Best Age to Claim Social Security
#4 Pre-tax retirement:
Pre-tax retirement accounts include traditional IRAs, 401(k)s, 403(b)s, 457s, SEP IRAs, and other similar accounts on which you have yet to pay income taxes. These accounts are tax-deferred, and taxes are levied upon withdrawal as income. In most cases, the longer you can wait to tap into these accounts, the better. However, keep in mind that the IRS has minimum distribution requirements, as shown in the table below:
Date of birth Age for first RMD:
DOB Age
6/30/49 or earlier 70½Â
7/1/49-12/31/50 72Â
1951-1959 73
 1960 or later 75
Related article: Seniors, Beware: The Shocking Truth About Taxes After 65Â
#5 Roth accounts:
Roth accounts offer tax-free growth, and qualified withdrawals are tax-free. These accounts are likely your most tax-efficient savings vehicles, except for health savings accounts. Continuing the previous theme, it’s advisable to let the investments with the highest growth potential accumulate for the longest period. Furthermore, Roth IRAs have become excellent tools for transferring wealth to beneficiaries under the SECURE Act, as distributions are tax-free. In many cases, withdrawals can be deferred for up to 10 years after death.
It’s important to note that the SECURE 2.0 Act eliminated the minimum distribution rules (as shown in the table above) for all Roth accounts. Theoretically, you could choose never to withdraw from these accounts and allow your children to benefit from your smart tax planning. However, that approach might lack the excitement of enjoying the fruits of your labor.
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Remember, while the order outlined here provides a general framework for retirement account withdrawals, individual circumstances, and goals should always be considered to make the best decisions for your specific situation.