Quick Summary
For high-income families, retirement income planning requires more than deciding which account to use first. Coordinating withdrawals from brokerage, traditional IRA, and Roth accounts can help manage taxes, fund spending, and preserve flexibility. This article explores how to give each account a purpose and adjust the mix as your family’s needs change.
Many families reach retirement with money in three broad places: a taxable brokerage account, a traditional retirement account, and a Roth account.
The natural question is, “Which one should we use first?”
It sounds like there should be a standard answer. In reality, a permanent withdrawal order is often too simple. The right mix can change from one year to the next based on income, taxes, market conditions, charitable goals, and upcoming expenses.
A better starting point is to understand what each account is designed to do and then decide how the accounts can work together.
Three accounts, three different tax experiences
A taxable brokerage account is funded with money that has already been taxed. You can generally access the money when needed, but the account may produce taxable interest, dividends, and capital gains along the way. When an investment is sold, tax is usually based on the gain, not the full amount withdrawn.
A traditional IRA or retirement plan generally delays tax. The money may grow without annual tax on the activity inside the account, but distributions are generally included in taxable income. Required distributions may also begin later in life under federal rules.
A Roth account works differently. Contributions or conversions are generally made with after-tax dollars, and qualified withdrawals can be tax-free. Original Roth IRA owners also generally do not have lifetime required minimum distributions.
One account offers access and tax-lot flexibility. One offers tax deferral. One may offer tax-free qualified income and long-term flexibility. The planning opportunity comes from using those differences intentionally.
Begin with the amount the family actually needs
Before choosing an account, start with the spending plan.
How much cash is needed for normal living expenses? Are there estimated tax payments, travel, family support, charitable gifts, or a major purchase coming up? How much should remain in reserve?
Then identify the income that will arrive without another portfolio withdrawal. That may include wages, business income, a pension, Social Security, rental income, dividends, interest, or required retirement distributions.
The difference between expected cash needs and expected income is the amount the portfolio must provide.
This sounds basic, but it prevents a common mistake: taking a large distribution before deciding whether the money is needed or what tax effect it may create.
Let the taxable account provide flexibility
Brokerage accounts are often useful for near-term spending because they can hold cash, short-term investments, and securities that can be sold by specific tax lot.
Suppose you need $100,000. Selling a high-basis investment may create only a modest taxable gain. Selling a low-basis investment may create a much larger gain even though the cash received is the same. That difference is why the tax lots inside the account matter.
The brokerage account may also contain appreciated investments that could be useful for charitable giving. Selling those assets first could close off an opportunity to give the investment directly to a qualified charity or charitable vehicle.
Taxes should not become the only concern. Refusing to sell an appreciated investment can leave the portfolio too concentrated. The account still needs to support the family’s liquidity and investment plan.
Use traditional retirement accounts thoughtfully
Traditional IRA distributions are generally taxable as ordinary income. A larger withdrawal can affect the family’s marginal tax rate and may influence the taxation of other income, Medicare-related premiums, or state taxes.
That does not mean the traditional IRA should always be saved for last.
Some retirees have lower-income years before required distributions begin. A planned IRA withdrawal or Roth conversion may fit well during that period. In another year, an already-required distribution may provide much of the cash the family needs.
The important point is to look at several years, not just the current tax return. Deferring every dollar from a traditional IRA can create larger required distributions later. Taking too much too soon can create unnecessary current tax. The useful balance depends on the family’s full plan.
Preserve the Roth account without treating it as untouchable
Qualified Roth withdrawals can be especially useful in a year when the family wants cash without adding more taxable income. They may also provide valuable long-term capital for a surviving spouse or future beneficiaries.
For those reasons, many families prefer to preserve Roth assets. That can be sensible, but it should not become an automatic rule.
Imagine a family that needs additional cash for a one-time purchase. Selling a concentrated taxable position may create a large gain, while taking the full amount from a traditional IRA may create an unwanted income spike. A partial Roth withdrawal could be part of a more balanced solution.
The purpose of the Roth account is to create flexibility. Treating it as permanently off-limits can reduce that flexibility.
A blended approach is often more practical
In many years, the answer is not one account. It is a combination.
A family might use dividends and cash from the brokerage account, satisfy a required distribution, sell selected high-basis investments, and use a smaller Roth withdrawal for the remaining need. Another year may call for more traditional IRA income because taxable income is temporarily lower.
The blend can help the family manage several goals at once:
- fund current spending;
- avoid creating more taxable income than needed;
- make use of lower-income years;
- preserve appropriate liquidity;
- keep the investment allocation on track; and
- retain flexibility for future tax or estate-planning decisions.
The best mix is rarely obvious from the account statements alone. It usually requires a cash-flow plan and a multiyear tax projection.
Match the investments to the account’s job
The income plan and the investment plan should support each other.
If the taxable account is expected to fund several years of spending, it should not be invested as though the money will remain untouched for decades. If the Roth account is intended mainly for long-term growth, it may be able to hold a different mix of investments than the near-term reserve.
This is sometimes called asset location: deciding where different investments should be held across taxable, tax-deferred, and Roth accounts. Tax treatment matters, but so do risk, return, liquidity, fees, and time horizon.
The goal is not to squeeze every possible tax advantage from every account. It is to make sure the accounts are invested and used in a way that supports the same financial plan.
Review the income plan every year
An annual review can begin with five questions:
- What does the family need to spend this year?
- Which income and required distributions will arrive automatically?
- What gains, losses, charitable gifts, or major purchases are expected?
- Are there lower-income years in which an IRA distribution or Roth conversion should be modeled?
- After the withdrawals, will the remaining portfolio still have the right liquidity and risk?
There is no account that must always come first. The more durable approach is to give each account a role, understand the tax rules, and adjust the mix as the family’s life changes.