Which Account to Spend First

The story: One bucket at a time, or a blend?

Walt plans to empty one account at a time, and Ruth shows how taking a little from each kind of account every year can even out taxes.

1. Narrator: Walt, 66, has three buckets: a taxable account, a traditional IRA and a Roth IRA. This is an example.
2. Walt: Simple plan: empty the taxable account first, then the IRA, then the Roth.
3. Narrator: That can mean years with almost no taxable income, then years later, big required withdrawals in a higher bracket.
4. Ruth: I take a little from my IRA each year to fill the low bracket, and the rest from savings.
5. Narrator: Blending evens out the tax over the years. The Roth waits for big-expense years.
6. Walt: So it’s not one bucket at a time. It’s a mix, every year.

What you’ll learn

1. The common default

   A common default is taxable accounts first, then tax-later, then Roth. It’s simple, but it can leave early years with almost no taxable income and later years with big tax bills.

2. Bracket filling

   Many plans take some tax-later money each year to “fill” the low tax brackets on purpose. That shrinks future required withdrawals and evens out taxes across the years.

   Example: if there’s room left in a low bracket after Social Security, an IRA withdrawal up to that room is taxed at the low rate.

3. Jobs for Roth and HSA money

   Roth money is flexible: qualified withdrawals add no taxable income, so it suits big-expense years, emergencies and heirs. HSA money is tax-free when spent on medical bills.

4. Think about heirs too

   Heirs pay tax on inherited tax-later money at their own rates. If they’re likely in a higher bracket than you, using more tax-later money yourself can lower the family’s total tax.

Key words

withdrawal order

which bucket pays first

bracket filling

using up low tax brackets on purpose

Common questions

Do I have to fill the bracket exactly?

No. It’s a guide. Many people aim close to the top of a low bracket and leave a little room for surprises.

Does this affect Medicare premiums?

It can. Higher income can raise Medicare premiums a couple of years later, so some plans watch those lines too. The fact card links to the rules.

Remember this

Don’t just empty one bucket. Blend to keep taxes low every year.

Try it: Map which bucket pays

1. List your buckets: taxable, tax-later, Roth and any HSA.
2. Note which bucket pays first in your current plan.
3. Try your plan in the public retirement calculator, and ask: is there room in a low bracket that tax-later money could fill?

No account: use the public Retirement Calculator (/tools/retirement-calculator).

Live facts

Numbers that change over time, with when they were last checked and where they come from.

• This year’s tax brackets

  Source: IRS.gov(opens in a new tab)

• How higher income raises Medicare premiums

  Source: Medicare.gov(opens in a new tab)