Retirees, did you know?

The order in which you spend your investment accounts in retirement… it matters!

Yes, there is a type of account that’s best to save for last. If you spend certain account types before others, you and your beneficiaries could forfeit growth and tax benefits. In this blog, I will tell you:

  1. The relevant difference between your account types
  2. Why a Roth IRA is often the best asset to leave for last
  3. Exceptions to my rule

Let’s dive in!

1) The relevant difference between your accounts

There are 3 basic types of accounts:

  • Taxable accounts
  • Pre-tax qualified retirement accounts (here on referred to as IRAs)
  • Post-tax qualified retirement accounts (here on referred to as Roth IRAs)

These accounts are taxed differently, which is why the order in which you spend them matters. Here is what you need to know:

Taxable accounts: These are the least tax efficient, but they have the fewest rules.

If your taxable account earns money (dividends), you pay taxes every year, regardless if you take money out or not. Dividends are taxed at your capital gains rate.  Note: this rate is much better than being taxed at the ordinary income tax rate. Nonetheless, it is still money you owe to the government.

When you sell an asset in a taxable account, you will either have a capital gain or loss. If you purchased a stock for $100 in 2015 and sold it for $150 in 2020, your capital gain is $50. That $50 is taxed at your capital gains tax rate.

IRAs: If you have a pre-tax IRA, the money in that account has NEVER been taxed. It could grow tax free for decades, and the IRS wants their hands on it.

When you take money out of an IRA, it is taxed at your ordinary income tax rate (just like wages are). So, if you take $100 out of your IRA, that is $100 of reportable income you are taxed on. If you are in the 22% tax bracket, you would only get to keep $78. ☹

Roth IRAs: Taxes were already paid on the money deposited (like a taxable account). The growth and dividends occur tax free (like an IRA).

Here is the great part; when you take the money out of the account, there is NO tax owed. You pay your taxes at the beginning and then you are done!

Sidebar: Currently, we have historically LOW tax rates. While it’s not certain, I expect that tax rates will rise in the future. It’s worth considering contributing to a Roth and paying the tax now rather than paying at some unknown tax rate later in your retirement. (Unless perhaps your current tax bracket is very high and will be low in retirement.)

2) Why a Roth IRA is the best asset to leave for last

Reason 1: Remember how Roth IRAs get to grow tax free? That means the longer the money stays in the account and grows, the more tax benefit you receive.

If you need money in retirement, you can take it from your taxable accounts (no taxes owed when you distribute) or your IRA (taxes will be owed when you distribute). Yes, the IRA distributions will be taxed, but that means you get to leave the Roth IRA alone and free to grow!

Here is an illustration:

If you contribute $1,000 to a retirement account and it grows by $4,000 more, you have $5,000 total. Woohoo! If it was a Roth account, you could take all of that money out in retirement and pay $0 in taxes. 😊

If it was an IRA, you would take out the same $5,000 and have to pay $1,100 in taxes. (Assuming you were already in a 22% tax bracket, for the sake of an example).

Now imagine if you let that Roth IRA grow until it was worth $15,000. Think of all of that tax-free growth!! $$$

Reason 2: If you left spending your Roth IRA for last, your beneficiaries would receive tax-free money after you pass away.

Once you pass, your inheritors have 10 years to take the money out of the Roth IRA. They can spend it or reinvest it elsewhere. Thankfully, your beneficiaries won’t pay any taxes on the money they have to take out during those 10 years!!

If they inherit an IRA, they also must take the money out within 10 years. Unfortunately, they will pay tax on all of it. If your son inherits $1,000,000 from your IRA, he will likely take $100,000 a year for the next 10 years out of the inherited account. That means his income tax bracket just shot up by $100,000… yuck. He might be paying a lot of taxes.

3) Exceptions to my rule

I can’t (and wouldn’t) say you should never take money from your Roth IRAs until your other types of accounts are used. That wouldn’t be true in every circumstance.

Exception 1: There will be times in your retirement where you need to keep your taxable income low.

Perhaps it’s for Medicare limits. Maybe you need to keep below the next tax bracket, and if you took any more money from your IRA, you would be pushed over the limit. In this case, perhaps you should take some money from your Roth IRA. That way, your taxable income can stay low in the years you need it to.

Exception 2: Perhaps you are already advanced in years and are cautiously planning out your beneficiaries’ inheritance.

You have a taxable account with extremely low cost basis and a Roth IRA. Which account should you take money from now? Well, if you sell low basis stocks in your taxable account to get money to live now, you will be paying a lot of taxes. Remember, you pay tax on all the growth when you sell!

However, once your account is inherited, that low cost basis disappears! Your beneficiaries get to step up the cost basis and no longer owe that tax. Therefore, your tax savings created by waiting for the step up in cost basis might outweigh the benefit of saving the Roth for last.


There is no black and white answer to what kind of account you should distribute from each year. However, there is strong argument that spending from a Roth IRA last will provide you and your beneficiaries the greatest benefit!

This decision should always be made with a Certified Public Accountant and your financial planner. Reach out to them if you have questions about what plan works best for your unique situation! As always, check out all my blogs about retiring well, here!