A retiree couple plans to draw income in a specific order: Social Security, annuities, cash, and finally an IRA. The strategy raises a common question about tax efficiency in retirement. The sequence someone chooses can affect taxes, health-care costs, and long-term savings.
Social Security typically comes first because it provides a steady, inflation-adjusted benefit. Annuities add another guaranteed income stream, often with fixed payments. Together, these sources can cover essential living expenses before tapping personal savings.
Cash accounts are often spent next because they are easy to access and carry little tax burden. But using cash first can push larger IRA withdrawals into later years. That timing can create a spike in taxable income when required minimum distributions begin.
Required minimum distributions start at age 73 for most retirees. Withdrawing from an IRA later means larger balances and bigger mandatory withdrawals. Those withdrawals can push a retiree into a higher tax bracket.
Higher income can also raise Medicare premiums through income-related monthly adjustment amounts. A single year of elevated income may affect premiums two years later. That link makes withdrawal order more than a simple cash-flow decision.
A balanced approach often works better than a strict sequence. Taking some IRA money earlier can reduce future mandatory withdrawals. It can also smooth taxable income across many years.
Each household faces different rules based on age, account types, and state taxes. A financial advisor or tax professional can model specific scenarios. The right order depends on personal goals, not a single universal rule.
