Which Account to Drain First

The Order Everyone Uses Is a Decent Default and a Bad Plan

The verdict first: spend taxable, then traditional, then Roth is a fine rule of thumb for someone retiring at 65 with a normal-sized 401k. It is a bad plan for a 45-year-old tech worker with $650,000 in a traditional 401k and thirty years for that balance to compound before the IRS forces it out. If that’s you, following the default order means you’ll spend your first decade of retirement paying $0 in federal tax and calling it a win, while the traditional balance quietly grows into a required minimum distribution that lands you in a higher bracket every year for the rest of your life.

The fix isn’t a different order. It’s a different question. Instead of “which account do I drain first,” ask “how much of each low tax bracket do I want to fill this year, and with what.” Spend from taxable for cash flow, sure, but every year you’re in a low bracket is a year you can also convert traditional dollars to Roth at a rate you control, instead of letting the IRS pick the rate for you decades from now. The math below shows exactly what that’s worth, and exactly what it costs.

Meet the $1.2 Million Portfolio We’re Draining

Our retiree is 45, single, and has $1.2 million split three ways: $400,000 in a taxable brokerage account, $650,000 in a traditional 401k/IRA, and $150,000 in a Roth. Spending is $48,000 a year, a 4% withdrawal rate on the whole portfolio.

Three assumptions, stated up front so you can argue with them. First, everything returns 5% real, after inflation. Second, we use 2026 tax figures and hold them flat. Those two go together: tax brackets and the standard deduction are inflation-indexed, so a real return against fixed real brackets is consistent, where a 9% nominal return against frozen 2026 brackets would quietly invent a tax increase. Third, the taxable account is half cost basis and half unrealized long-term gain, and we hold that ratio fixed as it drains. That last one is a simplification; in real life the gain fraction creeps up as you spend.

So every $1 withdrawn from taxable is 50 cents of basis (not taxed at all) and 50 cents of long-term capital gain.

Path One: Drain Taxable, Then Coast

This is the default order in action. Our retiree spends $48,000 a year entirely from taxable. That withdrawal carries $24,000 of long-term gain, and with no other income, the 2026 single standard deduction of $16,100 brings taxable income to $7,900. That’s far under the $49,450 taxable-income ceiling for the 0% long-term capital gains bracket (2026, single filers). Federal tax owed: zero.

At 5% real growth against a $48,000 draw, the $400,000 taxable account lasts about 11 years. Eleven years of retirement, $0 in federal tax. It’s a good deal and it is not a trick.

But look at what’s not happening during those eleven years. The $650,000 traditional account sits untouched and compounds to about $1.11 million by age 56. The Roth compounds too. When taxable runs dry, this retiree switches to living on traditional withdrawals, and now every dollar is ordinary income. To net $48,000 of spending money, you have to pull about $52,100 gross: taxable income of $36,000, tax of roughly $4,070 (10% on the first $12,400, 12% on the rest), leaving $48,030 to spend. Comfortably inside the 12% bracket. Nothing to panic about.

Now notice the trap. A 5% real return on $1.11 million is about $55,600 a year, and this retiree is only pulling $52,100. The account grows while they live on it. By 75 it’s around $1.22 million, bigger than the day they stopped working.

Under SECURE 2.0, anyone born in 1960 or later (which covers our 45-year-old) has an RMD start age of 75, not 73 and not the old 70½. The IRS Uniform Lifetime Table divisor at 75 is 24.6, so the first required withdrawal is $1,220,000 divided by 24.6, or about $49,600. That’s not optional and it’s not a choice about which bracket to fill.

By itself, $49,600 of RMD would still land in the 12% bracket. It doesn’t arrive by itself. Add Social Security, say $30,000 a year for someone who earned well and claimed late, of which up to 85% ($25,500) is taxable. (We switch it on at 75 to line it up with the RMD. Starting it at 70 makes Path One’s problem worse, not better, because five years of Social Security means five more years of the traditional account going untouched.) Now adjusted gross income is about $75,100, taxable income is about $59,000, and this retiree is in the 22% bracket (which runs from $50,400 to $105,700 for 2026 single filers). Federal tax: about $7,690 a year, every year, on money they never chose to withdraw. And the divisor shrinks as you age, so the RMD keeps climbing.

Path Two: Spend Taxable, Fill the Bracket

Same starting portfolio, same $48,000 spending need. This time our retiree also converts traditional dollars to Roth every year, filling ordinary income to the top of the 12% bracket.

The target is $50,400 of ordinary taxable income. Working backward through the $16,100 standard deduction, that means converting $66,500: $66,500 minus $16,100 equals $50,400. Tax on the conversion is $1,240 (10% of the first $12,400) plus $4,560 (12% of the remaining $38,000), for $5,800.

Now the wrinkle the default-order crowd usually misses. Conversions are ordinary income, ordinary income fills the brackets first, and long-term capital gains stack on top. Once the conversion occupies taxable income all the way to $50,400, there is nothing left under the $49,450 ceiling for 0% capital gains. Every dollar of gain from the taxable withdrawal now gets taxed at 15%.

That makes the withdrawal circular, which is where this kind of math usually goes wrong: pulling more to cover the tax creates more gain, which creates more tax. Solve it properly. Let W be the gross taxable withdrawal. You need W to cover $48,000 of spending, $5,800 of conversion tax, and 15% of W/2 in capital gains tax:

• W = 48,000 + 5,800 + 0.15(W ÷ 2)
• 0.925W = 53,800
• W = $58,162

Check it: $58,162 generates $29,081 of gain, taxed at 15% for $4,362. Add the $5,800 conversion tax and total tax is $10,162. Subtract that from $58,162 and you have exactly $48,000 to spend.

At a $58,162 annual draw, the $400,000 taxable account lasts about 8.6 years instead of 11. Over that stretch our retiree converts roughly $575,000 to Roth and pays about $87,400 in cumulative tax to do it. At the end, around age 54, the accounts look like this: taxable is empty, traditional is down to about $293,000, and Roth is about $926,000.

From 54 onward, this retiree lives on the Roth. $48,000 a year, tax-free, and (this is the part that compounds) modified adjusted gross income of zero. The traditional account sits untouched for 21 years and grows to about $834,000 by 75. The RMD is $834,000 divided by 24.6, or about $33,900.

Stack the same $30,000 Social Security on it. With less other income, only about $17,200 of the benefit is taxable instead of the full 85%, so taxable income is about $35,000, still inside the 12% bracket. Federal tax is about $3,950 a year instead of $7,690, and there is still roughly $863,000 of Roth sitting there with no RMD attached to it.

Run it out from 45 to 95 and Path One pays roughly $231,000 in federal tax ($0, then 19 years at $4,070, then 20 years at $7,690). Path Two pays roughly $166,000 ($87,400 up front, then 21 years of nothing, then 20 years at $3,950). A $65,000 gap in Path Two’s favor, and this is the number every Roth conversion article stops at.

Don’t stop there, because that sum is wrong in a way that matters. It adds a dollar paid at 45 to a dollar paid at 94 as if they were the same thing, while assuming everywhere else that money compounds at 5% real. It doesn’t. A dollar of tax paid at 45 is a dollar that never compounds for fifty years, and at 5% real that dollar was worth $11.47 of age-95 wealth. Discount both streams back to age 45 at the model’s own rate and Path One’s tax bill is about $53,000 while Path Two’s is about $85,000. The ranking flips.

The balance sheet agrees. At 75, Path One holds about $1.87 million across traditional and Roth; Path Two holds about $1.70 million. Path One’s pile carries more embedded tax, since more of it sits in the traditional account, but haircut it at the ~15.5% effective rate this model produces at 75 and Path One is still ahead by roughly $117,000.

So convert with your eyes open. Bracket filling is not a machine that prints money, and anyone pitching it that way is quietly skipping the discount rate. What it buys is control: a forced distribution of $33,900 instead of $49,600, a 12% bracket instead of 22%, and a large balance the IRS can never make you touch. That control pays off in the scenarios a clean spreadsheet doesn’t model. A spouse dies and the survivor files single on half the brackets. A $90,000 medical year arrives and you need cash that doesn’t move your MAGI. Congress raises ordinary rates. Convert for those, not for the $65,000.

Why “Taxable First” Exists, and Where It’s Still Right

The default order is incomplete rather than wrong, and it exists for real reasons. Tax-deferred accounts benefit from every extra year of compounding before withdrawal. Taxable withdrawals get partial basis treatment, so they’re never fully taxed the way a traditional withdrawal is. And the 0% long-term capital gains bracket is real money: with the $16,100 standard deduction, a single filer with no other income can realize about $65,550 of long-term gain and owe nothing on it, because only the amount above the deduction counts toward the $49,450 ceiling.

Where this default is still the right call: if your traditional balance is modest relative to your spending, such that RMDs will never push you past the bracket you already live in, there’s no bracket-filling problem to solve. Someone retiring at 65 with $300,000 in a 401k and $50,000 a year of spending needs isn’t staring down a tax bomb. The strategy here is for people whose traditional balance is large enough, and whose retirement is early enough, that decades of compounding turn “modest RMDs” into a second income you didn’t ask for.

Notice which number actually drove our example: the traditional account grew while being spent from, because a 5% real return on $1.11 million exceeds a $52,100 withdrawal. That’s the test. If your planned withdrawal is smaller than the growth on the account you’re withdrawing from, the balance is going up and the RMD problem is real.

The Three-Way Fight for Your Low-Income Years

Every dollar of Roth conversion competes with two other things that want your low-MAGI years: the 0% capital gains bracket you just watched get crowded out, and, if you’re not yet on Medicare, your ACA marketplace subsidy.

As of September 2026, the enhanced premium tax credits from the American Rescue Plan and the Inflation Reduction Act have expired, and the strict 400% federal poverty level cliff is back for the 2026 plan year. Cross that line and the subsidy doesn’t shrink, it disappears. The 2026 plan year uses the 2025 federal poverty guideline, which for a single-person household is $15,650, so the cliff sits at $62,600 of MAGI. (Check the current guideline for whatever plan year you’re buying; the number moves every January.) Our Path Two retiree, converting $66,500 and realizing $29,081 in gains, is at roughly $95,600 of MAGI, nowhere near qualifying. Path One’s retiree, whose MAGI during the draining years is just the $24,000 of realized gain, sits far under the cliff and likely gets a substantial subsidy.

That’s the tradeoff, named plainly: a dollar of Roth conversion can cost you more in lost ACA subsidy this year than it saves you in avoided tax two decades from now. A full-freight marketplace plan for a 50-something can run $700 to $1,000 a month, so the subsidy at stake is frequently larger than the $3,700 a year of bracket savings Path Two bought. If marketplace coverage matters to your budget, the right move for a given year might be converting less than the bracket ceiling, or not converting at all. Run both numbers before you convert.

Later, once Medicare starts, the same MAGI-driven logic reappears as IRMAA, a Part B and Part D surcharge based on your MAGI from two years prior. For 2026, the surcharge starts above $109,000 MAGI for single filers ($218,000 married filing jointly), on top of the standard $202.90 monthly Part B premium, and the five surcharge tiers add between $1,148.40 and $6,936 per person per year. A big conversion year at 63 becomes a Medicare premium problem at 65. Same fight for the same low-income space, different opponent.

Getting Cash Before 59½ Without the 10% Penalty

None of this works if you can’t get money out before the standard retirement age, so here’s how the access rules fit together.

Roth contribution basis (the amount you put in, not the growth) can be withdrawn at any time, at any age, tax-free and penalty-free. No loophole involved, that’s how Roth IRAs have always worked.

Converted amounts are different. Each conversion starts its own five-year clock on January 1 of the year you converted, separate from every other conversion’s clock and separate from the account’s opening date. Pull the taxable portion of a conversion out before that clock runs and before you turn 59½, and the IRS charges a 10% penalty on it, even though you already paid income tax at conversion. Past 59½ the penalty stops applying regardless of the clock. This is what makes a conversion ladder work: convert a chunk every year starting well before you need it, and five years later that rung is accessible penalty-free, on repeat.

The Rule of 55 is narrower than people think. It lets you take penalty-free withdrawals from your current or most recent employer’s 401k or 403b if you separate from that employer during or after the calendar year you turn 55 (age 50 for qualified public safety employees). It does not apply to IRAs, and rolling that 401k into an IRA kills your eligibility. Check this before you consolidate accounts on your way out the door.

SEPP, under section 72(t), lets you take substantially equal periodic payments from an IRA before 59½ without penalty, calculated by one of three IRS-approved methods. The catch: once you start, you’re locked in for five years or until 59½, whichever is longer, and busting the schedule triggers the 10% penalty retroactively, plus interest, on everything you’ve taken. There is one sanctioned escape hatch, a one-time switch from the fixed amortization or fixed annuitization method to the RMD method, which lowers the payment without blowing up the plan. It’s a tool for people who need steady, known income and will commit to it for years.

Notice what’s doing the real work in all of this: the taxable account. No age restriction, no five-year clock, no separation-from-service requirement. It’s the bridge that buys time for a conversion ladder to season, which is exactly why Path Two still spends taxable first for cash flow. It just also uses those same low-income years to build the ladder.

Save Roth for Last, on Purpose

Once you’ve built it, don’t touch it if you don’t have to. Roth IRAs have never carried a lifetime RMD, and since SECURE 2.0 took effect in 2024, Roth 401k and 403b balances don’t either. A Roth account is the one piece of your portfolio the IRS can’t force you to shrink while you’re alive.

It’s also your shock absorber. If a $40,000 roof repair shows up in a single year, taking that from a qualified Roth distribution (you’re past 59½ and the account is at least five years old) doesn’t touch your MAGI, your bracket, your ACA subsidy, or your IRMAA tier. Taking it from traditional hits all four at once. Before 59½ the same move is still possible out of contribution and seasoned-conversion basis, which is another reason to start the ladder early.

One honest caveat on inheritance. A Roth is the best account to leave behind, since qualified withdrawals come out tax-free for the beneficiary, but “no RMDs” is a lifetime-of-the-owner rule. Most non-spouse beneficiaries have to empty an inherited Roth within 10 years. Tax-free for a decade beats taxable forever, and it isn’t the infinite runway some people plan around.

If You Do Nothing Else: The Order

1. Keep one to two years of spending in cash or taxable so you’re never forced to sell at a bad time or skip a conversion because you need the liquidity.
2. Check the test from above: is the expected growth on your traditional account larger than what you plan to withdraw from it? If yes, the balance is growing and you have an RMD problem to solve now, not at 70.
3. Every year, before December 31, estimate your MAGI so far and convert up to whichever ceiling binds tighter, your target tax bracket or the ACA subsidy cliff. Usually it’s the cliff.
4. Discount before you decide. If you’re comparing two strategies by adding up decades of tax bills, you’re comparing the wrong numbers. Bring both streams back to today at your real return first.
5. Start a conversion ladder now if you’re retiring before 59½, so a five-year-seasoned rung is always coming due.
6. Confirm whether the Rule of 55 applies to your specific former employer’s plan before you roll it into an IRA.
7. Model your actual RMDs, at your real SECURE 2.0 age of 73 or 75, before you turn 60. Include Social Security in the model. The RMD alone rarely breaks a bracket; the RMD plus Social Security usually does.
8. If you’re married, model what your spouse’s RMD looks like filing single after you’re gone. The brackets don’t double for a surviving spouse; the balance does.
9. Leave the Roth alone as long as you can. It’s the account you spend last and the one you’d most want to inherit.

Common Questions

Can I withdraw Roth IRA contributions before age 59 1/2 without penalty?

Yes. Contribution basis (money you put in directly, not conversions or earnings) can be withdrawn at any age, tax-free and penalty-free, since you already paid tax on it before contributing. Converted amounts and earnings follow separate rules involving five-year clocks and your age at withdrawal.

What age do I have to start RMDs under SECURE 2.0?

Age 73 if you were born between 1951 and 1959, or age 75 if you were born in 1960 or later. This replaced the old 70½ threshold. The deadline for your first RMD is April 1 of the year after you reach your applicable age; every later year’s RMD is due December 31.

Does the Rule of 55 work with a rollover IRA?

No. The Rule of 55 only applies to your current or most recent employer’s 401k or 403b if you separate from service in or after the year you turn 55. Rolling that balance into an IRA removes the exception entirely, and IRAs then follow the standard age-59½ penalty rules instead.

What is the 72(t) SEPP rule for early retirement withdrawals?

SEPP lets you take substantially equal periodic payments from an IRA before 59½ without the 10% penalty, using one of three IRS-approved calculation methods. You must continue the payments for five years or until 59½, whichever is longer. Busting the schedule applies the penalty retroactively with interest, though one method switch is permitted.

How is Medicare IRMAA calculated?

IRMAA uses your modified adjusted gross income from two years prior, so 2026 Medicare premiums are based on your 2024 tax return. For 2026, surcharges start above $109,000 MAGI for single filers and $218,000 for married couples filing jointly, added on top of the standard $202.90 monthly Part B premium.

Related Reading

• The Roth Conversion Ladder
• The 0% Capital Gains Bracket
• Health Insurance Before 65
• Roth vs Traditional: Which One?
• The 4% Rule: Does It Still Hold?