Most Retirees Mismanage Withdrawal Order, Costing Them in Taxes
Nine in ten retirees miscalculate how to draw down savings, a sequence that shapes both tax bills and quality of life.
A large majority of retirees are making a costly mistake in how they sequence withdrawals from their savings accounts, according to a report from MarketWatch. The error is not simply how much money they spend, but the order in which they tap different account types — a distinction that carries significant tax consequences over time.
Financial planners broadly recognize that retirees typically hold assets across multiple account structures: taxable brokerage accounts, tax-deferred vehicles such as traditional IRAs and 401(k)s, and tax-free accounts like Roth IRAs. Each category is treated differently by the IRS, and drawing from them in the wrong sequence can push retirees into higher tax brackets, trigger larger Medicare premium surcharges, or accelerate the taxation of Social Security benefits.
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Beyond taxes, the sequencing decision carries lifestyle implications. Retirees who defer spending from certain accounts too long may find themselves sitting on wealth they never meaningfully use, while those who draw down too aggressively early may face constraints later in retirement when health or other costs rise. The miscalculation, experts suggest, reflects a tendency to focus narrowly on account balances rather than the after-tax value of those balances.
The stakes of getting this right have grown as more Americans enter retirement with a mix of account types accumulated across decades of saving. A withdrawal strategy optimized for tax efficiency can meaningfully extend how long a portfolio lasts and how much spendable income a retiree actually receives each year, without requiring any additional saving or investment risk.
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