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One of the first things I look at when working with someone who is approaching or already in retirement is how they're planning to take money out of their accounts. There are some good rules of thumb, but retirement is one of those situations where following a rule too rigidly can actually cost you money.
I recently worked through a case that is a good example of this. The couple in this example is in their early 60s, recently retired, and needs about $11,000 per month to support their lifestyle in Ohio. They have money in a taxable account, traditional IRAs, and Roth accounts.
At first glance, the withdrawal strategy seems pretty straightforward. Use the taxable account first, then move to the traditional IRA, and leave the Roth alone as long as possible. That's a common approach, and there are good reasons for it. Roth money can continue growing tax free, and qualified Roth withdrawals are tax free.
The problem is that this couple is also dealing with another major piece of the retirement puzzle: health insurance.
Their COBRA coverage ends at the end of 2026, so beginning in 2027 they'll need to purchase health insurance through the Marketplace. Since they're not yet eligible for Medicare, the amount of household income they report could have a significant impact on what they pay for that coverage.
Let's start with what they're currently doing.
They have money remaining in their taxable account, but that account is expected to be depleted by the end of 2026 or early 2027. For purposes of this example, let's assume they have about $50,000 left.
For 2026, that actually looks pretty good from a tax perspective. Most of their retirement spending is coming from the taxable account, so their taxable income remains relatively low. In this example, their combined federal and state income tax is only about $9,000.
If we stopped the analysis there, it would be easy to conclude that everything is working pretty well. But once we zoom out and look at 2027, the picture changes.
Once the taxable account is gone, they would take their $11,000 monthly spending from their traditional IRA. Those withdrawals will be taxable, so both their adjusted gross income and taxable income increase significantly.
In our example, their total income tax comes out to about $22,000 for the year 2027.
That's not ideal, but the bigger issue is what happens to their health insurance.
For people who retire before Medicare, the cost of health insurance can be one of the most important variables in a retirement income plan.
Marketplace subsidies are based in part on household income. For 2026 and 2027, the premium tax credit generally applies within the applicable income range, including the 400% federal poverty line limit under current law, assuming the other eligibility requirements are met. The income calculation is based on household modified adjusted gross income.
That means a large IRA withdrawal can have a second-order effect.
You take more money from the IRA, which increases your taxable income. That increases your household MAGI, which can reduce your Marketplace premium tax credit. If your income gets high enough, you can potentially lose the subsidy altogether.
In this case, that's exactly what happens.
We estimate that the couple's health insurance premiums could be around $30,000 for 2027 if they lose their subsidy. This is based off of silver plan averages in their zip code.
Now look at the total cost. They're paying roughly $22,000 in income taxes plus another $30,000 in health insurance premiums. That's about $52,000 in combined costs next year.
This is where the planning gets interesting.
Instead of completely spending down the taxable account in 2026, what if we preserve some of that money for 2027?
Let's assume the couple has about $50,000 remaining in the taxable account. We could leave that money available for 2027 and take additional money from the traditional IRA during 2026.
That will increase their 2026 tax bill. At first, that may not sound like a good idea. If we're trying to save the client money on taxes, why would we intentionally create a larger tax bill this year?
Because we're not trying to optimize one tax return. We're trying to optimize the retirement plan.
By taking some additional IRA distributions in 2026, we can preserve the taxable account for 2027. Then, once we get into 2027, we can use that $50,000 taxable account, take a controlled amount from the traditional IRA, and use the Roth to fill in the remaining amount needed to reach their $11,000 monthly spending target.
Now we're using all three account types instead of relying almost entirely on the traditional IRA.
In this example, we estimate that we could take around $65,000 from the traditional IRA in 2027 while keeping their income below the applicable Marketplace threshold. The remaining amount needed, about $18,000 after tax withholding from the IRA distributions, could then be covered with the Roth.
The original strategy looks better if you only look at 2026. Their tax bill is relatively low, which feels like a win. But once we look at 2027, the higher IRA withdrawals create a much larger tax bill and eliminate their Marketplace subsidy. Their healthcare premiums could go from roughly $7,000 to $30,000 for the year.
With the adjusted strategy, we accept a higher tax bill in 2026. In exchange, we're able to use the taxable and Roth accounts in 2027 to keep the IRA withdrawals under control.
That allows the couple to receive a significant health insurance subsidy next year. In this example, their estimated Marketplace premiums fall from about $30,000 to around $7,000.
When you add the income taxes and healthcare premiums together, the difference is roughly $30,000. That's a pretty meaningful savings for simply changing the order in which the accounts are used.
Yes. And this is where the tradeoff comes in.
There is a reason the traditional withdrawal strategy tells us to leave the Roth alone. If we take $18,000 out of the Roth today, that money is no longer sitting in the account and compounding tax free.
Let's say that $18,000 earns 10%. That's $1,800 of potential tax-free growth we're giving up over the next year. Over time this will likely compound into more on an annual basis.
That's not nothing. But compare it with the potential savings in this example. We're giving up some future tax-free growth in exchange for roughly $30,000 of savings in taxes and healthcare costs.
To me, that's a trade worth taking.
That doesn't mean it will always be the right answer. The numbers could look completely different for another household. Maybe the Roth withdrawal would be much larger. Maybe the Marketplace subsidy would be smaller. Maybe there are significant capital gains in the taxable account. Maybe the client has pension income or other sources of taxable income.
That's why I don't think retirement withdrawal strategies should be based solely on a rule of thumb. You have to actually run the numbers and see how the different decisions affect the rest of the plan.
One of the things I like about this example is that we didn't change the portfolio at all.
We didn't find a better investment. We didn't change the asset allocation. We didn't try to predict what the stock market is going to do. We changed the withdrawal strategy.
That decision affected their AGI. Their AGI affected their health insurance premiums. Their healthcare premiums affected their cash flow. And their cash flow affected how much they needed to take from their portfolio.
All of those pieces are connected.
I sometimes think about retirement planning like solving a Rubik's cube. You can move one piece, but that doesn't happen in isolation. Moving one piece changes what is happening somewhere else.
Portfolio growth matters, but so do taxes, healthcare, cash flow, Social Security, required minimum distributions, and the different tax characteristics of each account.
The goal isn't to optimize one piece of the puzzle. It's to make the pieces work together.
This is probably the biggest takeaway from this case. If you only looked at the couple's 2026 tax bill, the current strategy would look better. Their taxes are lower, and nobody likes paying more taxes than they have to.
But that doesn't capture the entire story.
By paying more tax in 2026, we will reduce their tax bill and healthcare costs in 2027. When you look at the entire period instead of one tax year, the strategy that initially looked less tax efficient actually produces a better overall result.
I'm not trying to help someone pay the least amount of tax this year. I'm trying to help them make good decisions across the entire retirement plan.
Sometimes that means paying a little more tax today because it saves you much more money later. Other times it doesn't. The only way to know is to run the numbers.
Not necessarily. Using taxable assets first is a reasonable starting point, but the best withdrawal order depends on your overall tax situation, future income, healthcare costs, required minimum distributions, and other factors. In some cases, taking money from a traditional IRA earlier can create a better long-term result.
No. Roth accounts are valuable because qualified withdrawals are generally tax free, so preserving them can make sense. But there are situations where using some Roth money earlier can improve the overall retirement plan. For example, a Roth withdrawal may help keep your taxable income lower and preserve eligibility for certain income-based benefits.
Yes. Traditional IRA withdrawals generally increase the income used to determine eligibility for the Marketplace premium tax credit. Taking a larger IRA distribution can increase your modified adjusted gross income and potentially reduce the amount of premium tax credit you receive.
The Marketplace generally uses household modified adjusted gross income when determining eligibility for the premium tax credit. This can include taxable income from sources such as traditional IRA withdrawals, pensions, wages, and investment income.
Yes, because qualified Roth IRA withdrawals generally aren't included in MAGI, using Roth assets instead of additional traditional IRA assets can sometimes help keep household income within the range needed to qualify for a Marketplace premium tax credit.
Sometimes. A retirement income plan should look beyond the current tax year. A strategy that produces a higher tax bill today could still make sense if it reduces future taxes, Medicare costs, Marketplace premiums, or other retirement expenses by more than the additional tax you pay today.
No. This is an example designed to demonstrate how different pieces of a retirement plan can interact. The right strategy depends on your income, account balances, tax situation, healthcare coverage, state of residence, age, Social Security benefits, and other factors.
The important point isn't that everyone should use their Roth before their IRA. The point is that the order of your withdrawals matters, and it should be coordinated with the rest of your retirement plan.
This is an example for educational purposes. Actual tax and healthcare outcomes depend on individual circumstances, household income, family size, state of residence, account balances, and applicable tax and Marketplace rules.
Beau Kemp, CFP®, RMA®
Founder, Financial Advisor
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