When you need to withdraw retirement money sooner than planned, the order matters. A recent Schroders survey found that 49% of retirees say expenses in retirement are higher than expected.
Start with your taxable brokerage account. Withdrawals from traditional 401(k)s or IRAs count as ordinary income, which can push you into a higher tax bracket and increase Medicare premiums. Money from a taxable brokerage account is typically taxed at long-term capital gains rates, which are lower. Look for cash, dividends, or interest you can withdraw first. If you must sell assets, use tax-loss harvesting by selling stocks at a loss to offset gains elsewhere. Prioritize selling stocks you have owned for more than a year to qualify for long-term capital gains rates.
Next, tap your traditional 401(k) and IRAs. This approach leaves your Roth savings untouched to grow longer. Withdraw only enough to stay within your current tax bracket without spilling over. Watch your modified adjusted gross income to avoid triggering higher Medicare Part B and Part D surcharges two years later. This strategy works for retirees between 59-1/2 and 73 who need income before Social Security and Required Minimum Distributions begin.
Last, pull from your Roth 401(k) and Roth IRA. Roth withdrawals are tax-free, and unlike traditional accounts, Roth IRAs have no Required Minimum Distributions during your lifetime. These accounts compound tax-free the longest and pass to heirs tax-free. Use Roth dollars strategically to cover larger expenses without raising your taxable income or triggering higher Medicare surcharges.