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Freedom for Retirement™ is the podcast designed to help you move beyond the fear of the complexity of finances so you can be financially free to achieve personal significance. Tune in with Josh Duncan each week to turn fear into fuel that drives you into Freedom & Significance.
Welcome to the Freedom for Retirement Podcast.
If you're a high-earning professional, business owner, or someone approaching retirement
and wondering whether you are truly on track, you are in the right place.
This podcast is all about helping you make smart, confident financial decisions without
the fear, confusion, or sales pressure that so often comes with money advice.
Each episode is designed to break down complex topics like retirement planning, investing,
taxes, and cash flow in plain English.
So you can understand what really matters and avoid the most common and costly financial
mistakes.
Everything you hear here is educational, fiduciary focused, and grounded in real-world
planning experience working with clients just like you.
I'm your host, Josh Duncan, partner at F5 Financial Planning.
Let's get started.
Which account should you spend first in retirement?
That sounds like a simple question, but if you have money in a checking account, a
brokerage account, a traditional IRA, and maybe a Roth IRA, the answer is not always
obvious.
And it matters because the account you choose can affect your tax bill, your Medicare
premiums, how much of your Social Security is taxable, your future required minimum
distributions, and even what your spouse or heirs may inherit someday.
Two retirees can have the same amount saved, the same spending needs.
And the same investment returns, but end up with very different after-tax results simply
because they pull money from different accounts in a different order.
That's why retirement income planning is not just about asking how much can I spend, it's
also about asking where should that money come from?
I'm Josh Duncan, partner at F5 Financial Planning, where we take a fiduciary approach to
maximizing our clients' wealth.
In today's video, we're going to walk through a retirement tax map.
To help you think through which account you should spend first.
We'll look at the three major tax buckets, why the common withdrawal rule of thumb can
fail, how to build a year-by-year withdrawal plan, and when Roth accounts should be
preserved or used.
The goal is to give you a framework so your retirement withdrawals are coordinated,
intentional, and aligned with your larger financial plan.
Check the description for a link to download the retirement tax map.
Let's start with why withdrawal order matters in the first place.
When you are working, income often feels fairly straightforward.
You earn a paycheck, taxes are withheld, you save what you can, the system has a built-in
rhythm.
Retirement is different.
In retirement, you may need to create your own paycheck from several different sources.
That could include Social Security, pensions, investment accounts, IRA withdrawals, Roth
accounts, cash reserves, rental income, or part-time work.
Each source may be taxed differently, and that is where retirees can get into trouble.
Let's say you need an extra $20,000 for spending this year.
You could take that money from a bank account, you could sell investments in a brokerage
account, you could withdraw it from a traditional IRA.
Or you could use Roth money.
In each case, the money spends the same, but the tax results may be completely different.
If you pull from a bank account, there may be little or no tax impact because the money's
already sitting in cash.
If you sell investments in a taxable brokerage account, you may create capital gains or
losses depending on what you sell and how long you've owned it.
If you withdraw from a traditional IRA or traditional 401k, that withdrawal is taxable as
ordinary income.
If you use qualified Roth dollars, the withdrawal is tax-free.
So the question is not just where is the money available, the better question is what
happens if I use this account now instead of another account?
That decision can ripple through the rest of your plan.
It can change your taxable income for the year.
Other effects are how much of your Social Security benefit is taxed, pushing your income
over a Medicare Earma threshold.
reduce or increase future required minimum distributions, and it can change what kind of
assets your spouse or heirs inherit.
This is why retirement income planning should not be done one account at a time.
If you only look at the account balance, you may miss the bigger picture.
A traditional IRA balance is not the same as a Roth IRA balance because taxes have not
been handled the same way.
A brokerage account is not the same as a checking account because selling investments may
create gains or losses.
And a Roth account is not just another source of cash because it can provide flexibility
later.
The key takeaway is that withdrawal order matters because every retirement dollar has a
tax character.
The goal is to use the right dollar at the right time.
Before you decide which account to spend first, you need to understand the three major tax
buckets.
The first bucket is taxable accounts.
This includes checking accounts, savings accounts, money market accounts, and taxable
brokerage accounts.
Cash in a bank account has usually already been taxed.
If you spend it,
You're not creating any new taxable retirement distribution.
A brokerage account is different.
The account itself is taxable, but that does not mean the full account is taxed every time
you use it.
You may owe tax on dividends, interest, and realized capital gains.
If you sell an investment for more than you paid for it, that may create a capital gain.
If you sell for less than you paid, that may create a capital loss.
So taxable accounts can offer flexibility, but they still need to be managed carefully.
The second bucket is tax-deferred accounts.
This includes traditional IRAs.
Traditional 401ks, 403Bs, SEP IRAs, simple IRAs, and similar retirement accounts.
These accounts often received a tax benefit on the way in, but the trade-off is that
withdrawals are taxable as ordinary income on the way out.
This is where many retirees have the majority of the retirement savings.
That's not a bad thing.
It means you saved well and took advantage of retirement accounts, but it also means part
of that account balance belongs to future taxes.
At some point, required minimum distributions may force money out of these accounts, even
if you do not need the income for spending.
The third bucket is tax-free accounts.
This includes Roth IRAs and Roth 401ks, assuming the qualified withdrawal rules are met.
Roth accounts can be very valuable because qualified withdrawals do not add to taxable
income.
That can create flexibility in years when you want to manage your tax bracket, avoid
stacking too much income.
Or preserve options for our surviving spouse.
Health savings accounts can also have tax-free treatment when used for qualified medical
expenses, but they have their own rules and should be handled separately.
A simple way to think about these buckets is to imagine three water tanks.
One tank gives you flexible access, but investment sales may create capital gains.
One tank gives you taxable income when you open the valve.
And one tank may provide tax-free income if the rules are met.
A good retirement income plan does not just drain one tank until it's empty and then move
to the next.
It coordinates the tanks.
The key takeaway is that before you ask which account to spend first, know which tax
bucket each account belongs to.
The bucket determines the tax consequences.
Now, let's talk about the common withdrawal rule of thumb.
You may have heard that retirees should spend taxable accounts first and tax deferred
accounts and Roth accounts last.
That can sound reasonable.
The idea is that you use the taxable accounts while allowing traditional retirement
accounts and Roth accounts to keep growing.
Then later, you use IRA money when required minimum distributions begin, and you preserve
Roth money for last because it has the best tax treatment.
In some cases, that approach may work, but as a universal rule, it can fail.
Here's the problem.
If you spend only taxable accounts early in retirement, you may keep your taxable income
very low for a while.
That might feel good because your tax bill is low today, but at the same time, your
traditional IRA or 401k may continue growing.
Then, when required minimum distributions begin, you may be forced to take larger taxable
withdrawals later.
That can create a tax spike.
It may also increase the taxation of Social Security benefits, raise Medicare premiums
through IRMA, and create a bigger tax burden for a surviving spouse.
This is especially important for married couples.
When both spouses are alive, they file a joint tax return.
But when one spouse dies, the surviving spouse will begin filing as a single taxpayer.
That can compress tax brackets and make the same income more expensive from a tax
standpoint.
See my video about the widow's tax.
So if the plan is simply do not touch the IRA until the IRS forces you to, you may be
pushing a larger problem into the future.
The opposite mistake can happen too.
Some retirees pull heavily from traditional retirement accounts early because that is
where most of their money is.
But if those withdrawals push income too high, they may create unnecessary taxes or
Medicare premium issues.
Others use Roth dollars too quickly because they like the idea of tax-free withdrawals.
But spending Roth money without a plan may waste one of the most flexible tools in
retirement.
This is why rigid rules can be dangerous.
Best withdrawal strategy is not based on a fixed order.
It's based on your tax picture, your income needs, your future RMDs, your Social Security
strategy, your Medicare situation, your investment plan, and your legacy goals.
Instead of asking, what account should everyone spend first, ask which account makes the
most sense for my household in this year?
For example, someone who retires at 62 and delays Social Security may have several lower
income years before required minimum distributions begin.
In those years, it may make sense to use a mix of taxable account withdrawals and partial
IRA withdrawals or Roth conversions.
Someone else may already be receiving Social Security pension income and required minimum
distributions.
Their best strategy may be very different.
The key takeaway is that rules of thumb can be a starting point, but they should not run
your retirement income plan.
Withdrawal order should be reviewed year by year.
So, how do you actually build your retirement tax map?
Start with the income that's already coming in.
That may include Social Security, pension income, annuity income, rental income, part-time
work, or required minimum distributions if you are already at that stage.
These income sources create the foundation.
Then look at your spending need.
How much do you need from your portfolio to support your lifestyle this year?
Not in theory, but in real life.
Include regular spending, travel, gifts, taxes, insurance, home projects, charitable
giving, and any larger expected expenses.
Once you know the gap between guaranteed or recurring income and spending, you can decide
which accounts should fill the gap.
This is where the tax map becomes useful.
You look at your current tax bracket and estimate your future brackets.
Estimate how large future RMDs might become.
Consider whether Social Security benefits are already being taxed or may become taxable.
Review Medicare Irma exposure.
Look at whether there is room for Roth conversions, and consider what assets you want to
preserve for a spouse, children, charity, or other legacy goals.
The goal is not to pay the lowest possible tax this year.
That may sound strange, but it's important.
Sometimes paying the lowest tax today creates a higher lifetime tax cost.
For example, if you keep income very low in your 60s by spending only from cash and
taxable accounts, you might miss an opportunity to move some IRA money into a Roth and a
reasonable tax rate.
Then later, when RDs begin, you may have less control.
A better plan might intentionally fill part of a lower tax bracket now to reduce pressure
later.
That might mean taking partial IRA withdrawals before RMDs begin.
It might mean doing Roth conversions in specific years.
It might mean realizing capital gains in a controlled way.
Might also mean using Roth dollars in a year when taxable income is unusually high.
The map also helps you avoid accidental problems.
For instance, if you were close to an IRMA threshold, one extra IRA withdrawal or capital
gain could make Medicare premiums.
More expensive later.
That does not automatically mean you should avoid the income and means you should know the
trade-off before making the decision.
A tax map is not just about taxes either.
It should coordinate with your investment plan.
You may have cash reserves for near-term spending, taxable investments for flexibility,
IRA assets for future income, and Roth assets for long-term tax-free growth.
The withdrawal strategy should respect the role each account plays.
This is why retirement income planning is part art and part math.
The numbers matter, but so do flexibility, timing, confidence, and purpose.
The key takeaway is this.
Build your withdrawal plan one year at a time, but with the next 10, 20, or 30 years in
mind.
Now, let's focus on Roth accounts because this is where a lot of retirees get conflicting
advice.
Some people say never touch the Roth, save it for last.
Others say use Roth money whenever you want tax-free income.
Neither answer is complete.
Roth accounts are valuable because they create flexibility.
If you need income in a year when you are already in a higher tax bracket, Roth dollars
may help fund spending without adding more taxable income.
If you're close to a Medicare Irma threshold, Roth dollars may help avoid stacking
additional income on top of everything else.
If one spouse dies, Roth assets may give the surviving spouse more control over taxable
income.
If you want to leave assets to children or other heirs,
Roth accounts may be attractive legacy assets because of their tax treatment.
For those reasons, preserving Roth money can make a lot of sense, but preserve it forever
is still not a plan.
There are times when using Roth money may be exactly the right move.
For example, imagine you have a year with unusually high taxable income because of a
property sale, a large capital gain, and RD.
If you also need extra spending money that year, using Roth dollars may prevent you from
adding even more.
Taxable income.
Or imagine a widow or widower whose tax bracket changed after the death of a spouse.
Roth assets may provide flexibility at a time when every dollar of taxable income is more
painful.
Or imagine someone who has done years of Roth conversion specifically to create a tax-free
reserve.
At some point, that account is not just there to look good on a statement.
It's there to support the plan.
The mistake is not using Roth money.
The mistake is using it without understanding what problem.
It's solving.
A Roth account can be a tax management tool, a longevity tool, legacy tool, and a
flexibility tool.
But it should be used intentionally.
So when deciding whether to use Roth dollars, ask a few questions.
What tax bracket am I in this year?
Will using IRA dollars push income too high?
Am I close to a Medicare Irma threshold?
Do I expect my tax rate to be higher or lower in the future?
And do I want to preserve Roth money for a surviving spouse or heirs?
And is this withdrawal helping the overall plan, or am I just choosing the account that
feels easiest?
The key takeaway is that Roth accounts are powerful because they give you options.
Don't automatically spend them first and don't automatically save them forever.
Use them when they improve the plan.
So which account should you spend first in retirement?
The honest answer is it depends, but it should not be a guess.
Start by understanding your three tax buckets: taxable accounts, tax-deferred accounts,
and tax-free accounts.
Then remember that the common rule of thumb, taxable first, IRA second, Roth last, is
probably not the best answer.
It may work for some retirees, but for others, it can create larger future RMDs, higher
taxes, higher Medicare premiums, or less flexibility for a surviving spouse.
A better approach is to build a retirement tax map.
Look at the income you already have coming in, estimate your spending needs, review your
tax bracket today, and what it may look like in the future.
Consider Social Security taxation, Medicare Irma, Roth conversions, required minimum
distributions, charitable goals, and legacy planning.
The goal is not simply to maximize taxes this year, the goal is to coordinate withdrawals
over your lifetime so your money supports your life with as much flexibility and
efficiency as possible.
That is why retirement income planning should be done across the whole household, not
account by account.
Your IRA, Roth IRA, brokerage account, cash reserve, social security pension, and
investment strategy.
should all be working together.
And F5 financial planning, we believe retirement planning should connect your income,
investments, taxes, estate planning, and long-term goals into one coordinated strategy.
Because retirement is not just about getting money out of accounts.
It's about using your wealth wisely to create clarity, confidence, and freedom for the
life that matters most to you.
If you found this episode helpful, please consider subscribing to the podcast and leaving
a review.
It helps more people find the show and continue learning how to make smarter financial
decisions.
I'm Josh Duncan, partnered F5 Financial Planning.
If you would like to learn more about how we help our clients achieve financial freedom
for personal significance, please visit our website at www.f5fp.com.
Thanks for listening, and I'll see you in the next episode.