How To Withdraw From A Roth IRA Vs Traditional IRA Vs Taxable Brokerage

Withdraw from your taxable brokerage first using specific identification of shares to minimize capital gains, then tap your Traditional IRA (which is fully taxable), and finally your Roth IRA to let it compound tax-free as long as possible. The key failure point is withdrawing from a Roth IRA before age 59½ and within the first 5 years of your initial contribution, which triggers taxes and a 10% penalty on earnings.

The tax-efficient withdrawal order

The key failure point is withdrawing from a Roth IRA before age 59½ and within the first 5 years of your initial contribution. That mistake triggers taxes and a 10% penalty on earnings. This order, taxable, traditional, Roth, is the backbone of most retirement withdrawal strategies. Executing it correctly requires understanding both the sequencing logic and the physical mechanics of each account type.

The rationale for draining your taxable brokerage first is that you’ve already paid taxes on the contributions. You only owe capital gains on the appreciation. By using specific identification of shares, you can select lots with the highest cost basis first. This minimizes your realized gains in any given year. For example, if you have 1,000 shares purchased at different prices, selling the highest-cost lots first produces the smallest taxable gain. This keeps your adjusted gross income (AGI) low. A lower AGI protects your Social Security benefits from being taxed and reduces Medicare Part B premiums. The exact cost basis levels depend on your purchase history and current market prices, which are facts with an expiry date set by the market. Confirm your specific lot details through your brokerage’s official platform.

Next, tap the Traditional IRA. Every dollar you take out is ordinary income. You are filling the lower tax brackets you’ve reserved. If you’re married filing jointly and your taxable income is below the 2024 threshold for the 22% bracket, you have room in the 12% bracket. The IRS sets these bracket thresholds, and they adjust annually. Check the official IRS website for the current year’s limits. Taking distributions up to that threshold from your Traditional IRA each year is almost always better than letting required minimum distributions (RMDs) force you into higher brackets later. The Roth IRA goes last. It is the only account where growth is permanently tax-free. You have no RMDs, so it can compound untouched for decades.

How to actually pull the money out of each account type

For a taxable brokerage, log into your brokerage platform and navigate to the sell menu. Select "Specific Identification" rather than "Average Cost" or "FIFO." Choose the lots you want to sell, enter the dollar amount or share count, and execute. The proceeds land in your settlement fund within two business days. You can then transfer them to your checking account via ACH. You’ll receive a 1099-B next January. Your tax software uses it to calculate capital gains. You’ll owe taxes only on the gains, not the full distribution.

For a Traditional IRA, you have two options: a systematic distribution plan or a one-time distribution. Call your IRA custodian and request a distribution form online or by mail. Specify the amount, frequency, and whether to withhold federal taxes. The default withholding rate is set by the IRS, but you can elect otherwise. The custodian will send you a 1099-R in January. The full amount is taxable. For a Roth IRA, the process is identical, but you must track your contribution basis using Form 8606. This proves which portion is a return of contributions versus earnings. If you’re over 59½ and have held the account for five years, the entire distribution is tax-free and penalty-free. Request a "qualified distribution" on the form to avoid any withholding.

The Roth IRA 5-year rule and other traps

The most common mistake is treating all Roth distributions equally. The IRS ordering rules are strict. Contributions come out first and are always tax- and penalty-free. Conversions come next, and each conversion has its own 5-year clock. Earnings come out last. If you touch earnings before age 59½ and before the first 5-year period from your initial contribution, you owe income tax on the earnings plus a 10% penalty. For example, if you contributed a certain amount, converted another amount, and the account grew, a distribution that reaches earnings is taxable and penalized if you’re under the rules. The specific dollar amounts of your contributions and conversions are personal facts. You must track them on your own Form 8606.

However, the penalty exceptions are broader than most people realize. You can take earnings out penalty-free, but not tax-free, for a first-time home purchase. The IRS caps this exception at a specific lifetime limit. Confirm the current figure on the official IRS website. Other exceptions include qualified education expenses or if you become permanently disabled. Also, the 5-year clock for conversions runs separately. A conversion made in 2020 becomes qualified in 2025, even if you’re under 59½. If you’re close to retirement, consider converting a small Traditional IRA to a Roth each year to start that clock. This gives you a tax-free emergency fund by age 60.

When the standard advice fails

The taxable-first order assumes you’re not managing a subsidy cliff. If you’re buying health insurance on the ACA marketplace, every dollar of Traditional IRA income reduces your premium tax credit. This effectively adds a surcharge to your marginal rate. In that case, taking money from a Roth early, even if it’s not qualified, might be cheaper than losing the subsidy. Similarly, if you’re on Medicare and will cross an IRMAA surcharge threshold, a large Traditional IRA distribution in a single year could significantly increase your Part B premiums for the next 12 months. The Centers for Medicare & Medicaid Services sets these income thresholds annually. Check their official site for the current brackets. Sometimes this makes a taxable brokerage distribution cheaper despite the capital gains.

Another exception: if you have a very low-income year, you should fill the 0% capital gains bracket with taxable brokerage gains. You should also fill the 10% or 12% bracket with Traditional IRA distributions, even if that means skipping the Roth last. The standard advice also breaks down if you have a pension that pushes you into a higher bracket. In that case, using Roth first to avoid RMDs might be smarter. Finally, your Social Security timing affects my withdrawal strategy. If you’re delaying benefits until 70, you have a window from 62 to 69 where you can do Roth conversions at low rates. During that window, you should take distributions from taxable to fund living expenses while converting, not the other way around.

The taxable-first, Roth-last withdrawal order is only optimal if it does not trigger a subsidy cliff on ACA health insurance or a Medicare IRMAA surcharge, making a penalty-free Roth distribution sometimes cheaper than losing a premium tax credit.

Frequently asked questions

Can I take money from my Traditional IRA before 59½ without a penalty?

Yes, if you take substantially equal periodic payments (SEPP or 72(t)). This forces you to take a fixed amount annually for five years or until age 59½, whichever is longer. You also avoid the penalty for medical expenses exceeding 7.5% of AGI or for health insurance premiums if you’re unemployed.

How do I track my Roth contribution basis if I’ve made multiple conversions?

You must file Form 8606 each year you make a contribution or conversion. The form tracks your cumulative basis on line 22. Your custodian doesn’t track this for you. You’re responsible for keeping your own records, including the 5498 forms you receive each May.

What if I need a large lump sum, like for a house down payment, in the first year of retirement?

Take it from your taxable brokerage first, even if it means realizing capital gains. You can then replenish your cash reserves by taking distributions from your Traditional IRA in later years. This effectively defers the tax hit. Avoid taking a large Traditional IRA distribution in one year. It can push you into a higher bracket and trigger IRMAA. The key to this strategy is understanding how to adjust withdrawals during a market downturn so you don’t lock in losses just to fund a large purchase.