Which Account Should Your Draw from First

This is a common dilemma for seniors who are retired and have investments in taxable accounts as well as tax-deferred ones, like IRAs. Generally, you would want to take money from your taxable accounts first so as to preserve the tax deferral of the other funds. There may, however, be circumstances where investors should consider alternatives.

When you withdraw funds from a taxable account, your income tax liability is limited to amounts exceeding your cost basis that has not been previously taxed. Whereas all money you take from your IRA is usually taxable. Yet if you let the IRA grow, you’ll pass that tax burden to your beneficiaries.

On the other hand, if you use the IRA funds first, you’ll have the income tax to pay. But then a greater amount of the taxable accounts can remain intact to transfer income tax free to your heirs.

It can be a tough choice to make and everyone’s situation is different. Here are two other solutions that you may want to consider:

Convert to a Roth IRA
You could roll your traditional IRA to a Roth. You’ll have to pay income tax on the amount transferred. But once the funds are rolled over, withdrawals and bequests are income tax free.

Wealth Replacement Trust
Compare your income tax liability of taking money from the taxable account vs. the IRA.
Also how big of a tax bill will your beneficiaries face? You could buy a life insurance policy to pay the income tax for them. And possibly you might finance it each year with the taxes saved by withdrawing funds from your taxable accounts rather than the IRA.