Why Leaving Your IRA for Last Can Backfire, or Pay Off

A common retirement question is which pot of money to tap first. One plan making the rounds runs in a specific order: Social Security first, then annuity payments, then cash on hand, and the traditional IRA last. The logic is that the more a retiree can cover with income that is guaranteed or scheduled, the less they need to pull from savings that are still growing.

Social Security anchors that sequence for good reason. Each year a person delays claiming past full retirement age, the monthly benefit rises by about 8 percent, up to age 70. For many households, waiting is the biggest single lever on lifetime income. An annuity works on a similar principle by turning part of a lump sum into a payment that keeps coming regardless of what the stock market does. Cash, meaning savings accounts and money market funds, comes next because it is easy to reach, even though it earns little. Spending it early leaves the invested accounts alone to compound.

The central claim here is that spending cash first can make income surge later on, and the mechanism is worth spelling out. Traditional IRA withdrawals are taxed as ordinary income. The IRS requires owners to start taking required minimum distributions at age 73 if they were born between 1951 and 1959, and at 75 if they were born in 1960 or later. If the IRA sits untouched for years, it can grow large, and the mandatory withdrawals that eventually arrive are bigger. Those amounts stack on top of Social Security and annuity income. The result can be a higher tax bracket, more of the Social Security benefit becoming taxable, and higher Medicare premiums through income-related surcharges.

That does not make the order universally right. Taking smaller amounts from the IRA earlier can even out taxes over the years, particularly for someone who expects to sit in a similar bracket later. Some planners also suggest converting part of an IRA to a Roth account in low-income years, which can shrink future required withdrawals. Health, a spouse's needs, and whether the retiree wants to leave money to heirs all change the math. A plan built around inheritance may treat a large, untouched IRA as an asset to protect, while a plan built around living costs may treat it as a bill that is coming due.

Before following any sequence, a few checks matter more than the rule of thumb itself. Read the annuity's terms closely: whether it is fixed or variable, how long the surrender period runs, whether payments rise with inflation, and whether they stop at death. Model taxes year by year using real account balances rather than assuming the answer. And keep an emergency reserve so that a market drop or an unexpected bill does not force a sale of investments at a bad price. A fee-only financial planner or a tax professional can run those projections.

The bottom line is that the order of withdrawals is a tax and timing decision as much as a spending one. Saving the IRA for last can work well when guaranteed income already covers essentials. It is still a choice that deserves a projection, not just a slogan.