Why Pulling From Your 401(k) Before Your Taxable Account Could Cost $45,000

The post Why Pulling From Your 401(k) Before Your Taxable Account Could Cost $45,000 appeared first on 24/7 Wall St..

The conventional retirement plan goes something like this: stop working, claim Social Security, and start pulling from the 401(k) when the bills come due. That order feels intuitive because the 401(k) is usually the biggest pot, and retirees have spent decades being told to leave Roth money alone. The problem is that the intuitive order is often the most expensive one.

The IRS taxes every dollar of a traditional 401(k) withdrawal as ordinary income, and stacking those withdrawals on top of Social Security benefits can push retirees into higher brackets and trigger taxation on benefits that would otherwise be partially shielded.

In practice, the smartest withdrawal sequence usually runs opposite to what most households do by default. Taxable brokerage accounts come first because long-term gains are taxed at preferential capital gains rates rather than ordinary income rates. Tax-deferred accounts (traditional IRAs and 401(k)s) come second, deliberately drawn down in years when the retiree can stay within a lower bracket.

Roth accounts come last, because every dollar inside a Roth grows tax-free and can be passed to heirs with no income tax liability. Reversing that order, or ignoring it entirely, is what creates the avoidable tax bill the headline references.

Why the order matters in 2026

The 2026 brackets give retirees real room to plan. A single filer pays 12% on income over $12,400 and does not hit the 22% bracket until income crosses $50,400. Married couples filing jointly stay in the 12% bracket until $100,800. Layer on the $32,200 standard deduction for joint filers (or $16,100 for singles), and a couple can pull a meaningful traditional IRA distribution before any of it is taxed above 12%. A retiree who skips that window and lets the balance compound until required minimum distributions kick in often ends up withdrawing larger amounts in the 22% or 24% bracket later.

Social Security further amplifies the underlying math. The program paid out $1,630.3 billion in benefits in the first quarter of 2026, according to the Bureau of Economic Analysis, and the 2.8% cost-of-living adjustment that took effect in January raised the income base for nearly every retiree on the rolls. Higher benefits push more households over the provisional-income thresholds at which up to 85% of Social Security becomes taxable. A traditional IRA withdrawal counts toward that calculation. A Roth withdrawal does not. Sequencing the withdrawals to keep provisional income lower in early retirement can keep more of the benefit out of the IRS’s reach.

What the conventional order looks like in practice

A simplified framework most planners use:

1. Taxable brokerage accounts first. Long-term capital gains are taxed at 0%, 15%, or 20% depending on income. Many retirees qualify for the 0% rate in early retirement before Social Security or RMDs begin.
2. Traditional IRA and 401(k) next. Withdrawals are taxed as ordinary income. Pulling enough to “fill up” the 12% bracket each year reduces the balance that will eventually be subject to RMDs at 73.
3. Roth IRA last. Distributions are tax-free, do not count toward provisional income for Social Security taxation, and have no required minimum distribution during the original owner’s lifetime.

Clark Howard’s resident advisor, Wes Moss, has noted on the show that 71% of years are positive in the stock market, which is one reason planners often recommend leaving tax-advantaged accounts invested longer rather than draining them first. The tax treatment compounds the same way the returns do.

What this means for the household budget

Personal savings have slipped to 3.7% of disposable income in the first quarter of 2026, down from 6.2% two years earlier, and per capita disposable income now sits at $68,391. Tighter household finances leave less margin for an avoidable tax bill in retirement. Three practical adjustments tend to surface in planning conversations:

• Use the years between retirement and age 73 (when RMDs begin) to convert portions of a traditional IRA to a Roth, filling the 12% bracket without crossing into the 22% bracket.
• Take long-term gains from taxable accounts in years when total income stays under the 0% capital-gains threshold.
• Coordinate withdrawals with Social Security claiming. Delaying benefits to 70 raises the eventual check and creates a longer window for low-bracket Roth conversions.

Withdrawal order is one of the rare retirement choices that costs nothing to change but can still reshape lifetime taxes in a big way. The default sequence, pulling from the 401(k) because it is the biggest balance, is the one that most often leaves money on the table.

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